Scalar Funds Management LLC is a bit of misnomer. The new commodity trading advisor (CTA)/registered investment advisory does not offer any funds, it offers managed accounts on a market neutral long/short strategy similar to a pairs trading hedge fund. Principal Scott Eisner will offer the strategy via the use of single stock futures (SSFs), traded at OneChicago, and straight equities.
“It took a while to put my disclosure document together because I don’t think there is anyone out there who is doing what I am doing,” Eisner says.
Eisner is chief financial officer of proprietary trading firm Harrison Trading Group, which is not affiliated with the Scalar Funds. In 2003, Eisner was trading principal for the Kottke Long/Short Equity Value Fund, the precursor to his current strategy. That fund outperformed its market neutral benchmark in its two-year track record. Eisner says it wasn’t until 2005 that OneChicago offered enough individual contracts to perform this strategy through futures.
Eisner gathers the quarterly financial statements for all of the components of the S&P 500, breaks them down and ranks them by sector. He then will select the best and worst in a particular sector to determine what to buy and sell. All trades will be executed through the customer’s broker. Each pair trade will risk 1% of the total account and will have a stop. The positions will be held, if not stopped out, until the next quarterly cycle.
David G. Downey, CEO of OneChicago, is encouraged by the strategy. “[Eisner] understands the math. We are very happy about it,” he says. “The issue that single stock futures has is that the securities side does not have the operational capacity to clear them.”
Downey recognizes that SSFs are tailor-made for this type of strategy but fund managers have had a hard time with their prime brokers who see SSFs as a competitive threat to their stock loan business.
“There is trade offs between [whether] you want to get dividends or are you better off with interest. The pure cost structure of the products might actually tip in favor of the single stock futures,” Eisner says.
The strategy does not rely on hedge fund restrictions but is limited to qualified investors with a $1.5 million net worth.
Good news for hedge funds
Hedge funds have produced solid returns so far in 2007 and have been rewarded with allocations. Hedge Fund Research (HFR) reports that the hedge fund industry has seen inflows of $60 billion in the first quarter of 2007. That number represents a 300% increase over the fourth quarter of 2006, when HFR reported inflows of $15.7 billion.
“Equity hedge” was the strategy that benefited the most with inflows of $20.3 billion, the largest quarterly inflow for a single strategy HFR has ever recorded.
