New options-based hedge fund Red Matter Management starts up in Lancaster County
Its name smacks of science fiction, but Red Matter Management Group LLC is real, and it's out to make a big profit on what could happen — or what may never happen — on the S&P 500 stock index.
The Mount Joy-based company is general partner in Red Matter Alpha Fund LP, a new options-based hedge fund that bets on the ups and downs of the S&P index.
“Red Matter is not a real thing and carries no value,” said Isaac Lance Eisenhauer, co-founder and portfolio manager. The name references the assets Red Matter plans to trade in: options that have no independent value.
But it still takes real money to make money. The two-man company is on pace to attract $1.5 million by Oct. 1 from high-net-worth investors.
“It's really just grinding it out and telling people about it,” Eisenhauer said of the company, which got its start this spring with a goal of attracting regional investors. “We're just trying to prove ourselves and continue to raise money.”
'More unique stance'
A native of Philadelphia, Eisenhauer got his start in financial services in 2010, working for TD Ameritrade Inc. in Texas. There he met Tyson Collins, his partner in this new venture.
“Our whole strategy is based on quantitative analysis and high-probability trades,” said Eisenhauer, who later worked as an equity and equity options trader with WTS Proprietary Trading Group LLC in New York City before moving to the Harrisburg area in 2013 to work again for TD Ameritrade. “It's not a guaranteed formula, but it's a more unique stance to the market.”
Like private equity funds, hedge funds appeal to wealthy investors. However, the focus of hedge funds is on maximum short-term profits versus the longer-term positions of most private equity funds and venture capital. Hedge funds also invest in anything and everything, which can be riskier.
More on the name
The company’s Red Matter name is not a “Star Trek” movie reference.
However, both partners are science enthusiasts, said Isaac Lance Eisenhauer, co-founder and portfolio manager.
“Dark matter supposedly exists all around us,” he said. “Red Matter is a term that is not real and that is made up. The link between the two is that our strategy is based upon statistics and probabilities of earning a profit.
“Since we sell ‘out of the money options,’ they have no real intrinsic value,” he said. “So our strategy is to sell options that really carry no real value, only a made-up value of what could potentially happen.”
“We wanted to be different in the hedge fund world,” Eisenhauer said, explaining why the fund focuses on put-and-call options related to the S&P index rather than on individual stocks.
A call option is a security that gives the owner the right to buy shares of a stock or an index at a certain price, or strike price, by a certain date. A put option is a security that you buy when you think the price is going to go down. It gives you the right to sell at the strike price.
Red Matter focuses on short-term options and its partners say recent market volatility is good for business because option premiums go higher.
“We don't care if the market goes up or down or sideways, as long as it's a moving market,” Collins said. “A very volatile market is difficult to trade in, but it's also the most profitable.”
Eisenhauer and Collins know they have their work cut out for them in being a midstate-based hedge fund.
The majority of large funds are started and based in major metropolitan areas because that's where many financial service jobs are and where the highest concentrations of affluent people live. And it's very much a blue-blooded culture where large investors only work with investment firms that have long track records and partners with business degrees from prestigious schools.
The typical hedge fund charges a 2 percent annual management fee on total assets, plus a 20 percent performance allocation fee on profits generated by the fund.
Red Matter Alpha Fund has a similar structure, though the new fund is offering a negotiated rate on the management fee for the first year, depending on how much an investor wants to commit, said Isaac Lance Eisenhauer, the fund’s portfolio manager.
“We want to do this to not only say, ‘Thank you for taking some risk,’ but it will keep the interest aligned to perform for our investors,” he said.
They also are waiving the typical minimum investment in such a fund, which is $250,000.
“Certainly there is wealth here in Central Pennsylvania, but these funds are more likely to spring up in major urban areas,” said Scott Penwell, a partner with Harrisburg-based Rhoads & Sinon LLP and member of Red Matter's board of advisers. “It's not an easy thing to do, raising money from the ground up.”
But startups are never easy and it takes more than a good product or strategy, he said. “You've got to perform and do the job and give people the return you tell them you can give them.”
Penwell was outside legal counsel and a trustee of the Emerald Mutual Funds in Lancaster County from 1992 to 2002.
“We're definitely focused on making a name for ourselves,” Collins said. “We want to grow organically. At the same time, our goal planning is out to five years now. That plan does involve mutual funds and growing larger.”
Red Matter's partners hope to have at least $15 million under management by this time next year. If they are able to make inroads with larger institutional investors, that could be much higher, he said. “We think we can shake the market up.”