09/21/2011

Lion’s Path Opens Incubator to Quant Pros

Lion’s Path Capital is carving out an unusual niche in the hedge fund-incubation arena: quantitative strategies.

Like other fund incubators, the New York firm provides startup capital, office space, operational support and compliance advice to fledgling managers. Since launching last year, Lion’s Path has backed 11 long/short equity startups.

But on Sept. 1, Lion’s Path took on its first two quantitative-trading specialists — Brunswick Capital and Harrington Street Advisors. And it is scouting for additional quant managers.

The quant focus is unusual in the incubation sector because of the highly technical nature of the traders’ strategies. In addition to the usual array of incubation services, Lion’s Path will provide quants with programming help to translate their algorithms into market-ready trading systems. It will then audit the results and, assuming good returns, eventually would help market the funds to outside investors, including other seeders.

Lion’s Path invests only partners’ money, typically backing startup managers with $1 million to $25 million apiece. Brunswick and Harrington both started trading this month with less than $5 million of seed capital. Lion’s Path currently is putting a third quant manager through a trial run.

Lion’s Path is focusing on quant strategies that can generate 12%-plus net returns and are designed to avoid drawdowns of more than 6%. Directional strategies must exit trades daily, while market-neutral strategies can hold positions overnight.

Unlike many hedge fund backers, Lion’s Path doesn’t seek stakes in the management companies. Instead, it takes a cut of fees, as well as any profits on its investments. It also insists on guaranteed capacity as a fund grows.

The terms can be particularly attractive to quant managers, who generally have no interest in sharing ownership of their proprietary-trading programs. That apparently was the case with Brunswick and Harrington.

New York-based Brunswick is led by two Caxton Associates alumni: Wayne Weddington, who once headed statistical arbitrage at Caxton and previously worked at Leeb Capital and Jemmco Capital; and David Noever, who focused on U.S. and European equities at Caxton and, before that, was a NASA scientist. They began trading their SysMacro Global Opportunity vehicle in early 2010 with friends-and-family money. The fund invests in S&P 500 futures.

Harrington Street, led by Clifford Titus, invests in the stocks of S&P 500 companies. Specifically, the New York firm looks to exploit trends in the first few hours of trading, and only trades from 9 a.m. to noon. Titus, who oversees a staff of four, previously worked at Knight Capital, Bank of New York and Morgan Stanley.

Lion’s Path’s quant-fund practice was developed by two of the firm’s four partners: Tim Harrington, who most recently worked at SAC Capital and J.P. Morgan Ventures, and Storm Boswick, who founded now-closed Brompton Cross Capital and previously worked at SAC unit Sigma Capital.