March 18, 2016 / 3:57 PM / 4 years ago

Hedge fund Paloma to take in new cash, eyes quant trading

NEW YORK (Reuters) - Paloma Partners, a $4-billion hedge fund that has spent much of the last three decades politely turning away would-be investors, is opening its doors, if only a crack to newcomers, three people familiar with the fund’s plans said.

With fresh trading opportunities emerging as investors worry about global growth, interest rate moves and who will win the U.S. presidency, Paloma has signaled it will add teams and take in some new cash for them to work with, the people said.

A company spokesman declined to comment on the plans.

Computer model-driven quantitative trades, which helped Paloma earn an 11 percent return in 2015 when most funds lost money, will be a focus again this year, the sources said. Since its 1981 launch, the Greenwich, Connecticut-headquartered firm has returned an average 12.4 percent per year, investors said.

Paloma’s decision to add new cash now is noteworthy both because many long-established funds are not taking more money and because Paloma’s founder, Donald Sussman, prefers running a smaller fund to being huge.

Sussman, 69, is often called the hedge fund industry’s grandfather who helped launch one of the world’s biggest firms; David Shaw’s $37 billion D.E. Shaw and more recently smaller players including Ben Levine’s $2 billion LMR Partners.

“One of the things that’s made him so successful over the years is that he tends to focus more on the soundness of an investment strategy than on how well it happens to have performed recently,” David Shaw said of Sussman.


Still, for Paloma, the goal has long been to limit size to retain more trading flexibility.

“We try to stay out of the crowded trade business and that is one reason I think it is impossible to run $20 billion because with so much money, you are in everyone’s crowded positions,” Sussman told Reuters.

Last year, Sussman said, he was concerned about equity market valuations and the market’s appetite for distressed debt.

Instead of joining the pack, his firm made quantitative statistical arbitrage trades and bets on non-agency residential mortgage-backed securities that helped lift returns.

“We do modestly sized debt deals of $20 million to $50 million where we can control the process. We tend to be in off-the-run things,” Sussman said.

This year, Paloma, which is known as a multi-strategy firm, is still focusing more heavily on computer model-driven bets that Sussman says can perform well in the current up and down trading environment.

This year, Paloma has earned a 1 percent return, beating the average fund which is down.

For years, quant traders’ black box investment bets were out of favor, something Sussman said helped him snap up people who felt “underpaid” and “under appreciated.”

“Donald was willing to provide the time and financial support that would be necessary for us to conduct a serious program of rigorous, quantitative research before we even placed our first trade,” D.E. Shaw’s David Shaw said.

As more resumes arrive, Sussman says he does not have to find the next savvy trade, but rather, others who will.

“We do get the pick of the crop of smart people with new ideas.”

Editing by Bernadette Baum

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