A Lancaster County-based hedge fund that bets on the ups and downs of the S&P 500 stock index is going long on the continued growth of the stock market.
“When the market is strong, you have no choice but to go long and be smart about risk,” said Isaac Lance Eisenhauer, portfolio manager at Red Matter Management Group. The group started in 2015 as an alternative investment option for high-net-worth investors.
Like many people, Eisenhauer stayed up late last month as the world digested Donald Trump’s presidential victory, which initially sent the futures for the Dow Jones Industrial Average down by about 800 points before the market reversed course over the next day.
The stock market has continued to surge since the election.
Eisenhauer said he was cautious and traded lightly before the election. He waited until the results sank in and then made some moves.
“Sometimes it’s smart to step out of the way of a freight train and then hop on when the move is being made,” he said.
Market volatility is often elevated by elections, especially surprise results, which boosts premiums on options and can help firms like Red Matter capture more yield a little faster, he said. “Now that it has calmed down, it’s a slower premium collecting process.”
Hedge funds typically focus on making maximum short-term profits instead of taking longer-term positions that private equity funds and venture capital firms do. Red Matter focuses on put-and-call options available on the S&P index.
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, the so-called 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.
Eisenhauer said the odds favor positive market growth in 2017. Big moves made by Trump, including tax cuts or regulatory changes, could fuel large market swings.
The company’s Red Matter Alpha Fund has a goal of achieving average S&P investment returns of 7 to 8 percent annually, but with a lot less risk because it plays the ups and downs of the index. The fund was up about 6.5 percent as of Dec. 20.
Eisenhauer did not disclose how much money his fund currently has under management.
However, the company is trying to boost the fund by aligning with traditional investment advisers in the midstate. The idea is to help investors with portfolio diversification and risk management.
Eisenhauer said his goal is to partner with at least two advisers in the coming year.