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May 24, 2017  

Ex-Citadel Trader Building Robust Operation

An energy-stock trader is marketing a fund designed in part to allay investor concerns about hedge fund performance and costs.

Matthew Smith, who previously spent nearly six years running an energy-stock portfolio at Citadel unit Surveyor Capital, plans to begin trading in the third quarter via his recently formed Deep Basin Capital of Stamford, Conn. The planned Deep Basin Long-Short Fund will encompass a market-neutral portfolio of liquid stocks.

Deep Basin’s marketing campaign emphasizes both the size and expertise of its investment staff. In addition to Smith, the team includes one of his analysts from Surveyor, Graham Melanson; a yet-to-be-named head of research; and three data scientists with experience in the energy sector. Kobi Platt, whose resume includes stints at Tudor Investment and the U.S. Department of Energy, will be joined on the database team by Travis Millburn and Garrick McComas, who previously worked together at energy-data supplier Genscape.

“The last thing we want to do is be an ‘also ran’ hedge fund that extracts fees from qualified investors and institutions without providing any incremental benefit,” Smith wrote in a May 15 letter to prospective backers. “Very few active managers or investment firms have provided exceptional returns when adjusting for fees, taxes and the risk taken in pursuit of those returns.”

Deep Basin’s investment process will combine “private equity-style deep fundamental modeling with computer/data science,” Smith wrote. “If you know where to look, the energy sector generates tremendously valuable fundamental data.”

Deep Basin’s pitchbook, meanwhile, addresses investor concerns about risk management and alignment of interests between the general partner and limited partners. The fund’s net exposure to the stock market will be “close to 0%,” and risk will be spread among 50-60 positions — with no one position accounting for more than 10% of total assets. Smith and his team will select stocks such that about 85% of the portfolio could be liquidated within 10 days.

According to the pitchbook, “substantially all” of the investment team’s liquid net worth will be invested in the fund. That’s not so unusual for a new hedge fund. But Smith also pledges to reinvest at least half of his profits for the first five years.

As for fees, investors can elect to pay a conventional 20% performance fee, or tie the manager’s incentive allocation to the fund’s Sharpe ratio — a highly unusual arrangement. Details are sketchy, but at least one other hedge fund firm, Marchese Investments, charges a performance fee equal to some multiple of its Sharpe ratio.

At Surveyor, a New York equity-trading unit of Chicago-based Citadel, Smith’s portfolio grew from $100 million to $3.6 billion at its peak. He oversaw a team of five analysts. Prior to Surveyor, Smith worked at Copper Arch Capital and Highfields Capital.

Also on board at Deep Basin is chief operating officer Harry Hjardemaal, formerly of Scopia Capital.