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Dec 17, 2020

Mike Novogratz backs volatility fund betting COVID-hit trade rebounds

The digital age is finally coming to finance: Novogratz on Bitcoin rally and IPO

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Mike Novogratz, the billionaire Bitcoin investor, is wagering on volatility, a market that’s still scarred from the COVID crash earlier this year.

Novogratz, 56, is among the backers of Millbank Dartmoor Portsmouth LLC, an investment fund founded by Wall Street veteran Dennis Davitt that seeks to have more than US$1 billion under management within the next 12 months. The firm will offer volatility-based strategies to investors such as pension funds and family offices, Davitt said in an interview -- including versions of the so-called short-volatility bets that imploded in March.

Davitt witnessed that COVID turmoil first-hand. He’d just joined hedge fund Malachite Capital Management, only to have it shut because of wrong-way bets that markets would stay more subdued than investors expected.

The panic subsided after unprecedented government intervention. As ultra-low interest rates persist, Davitt and his backers are hoping investors will ease back into these strategies, which he’s aiming to deliver using more transparency and less leverage than the funds that got into trouble.

“The most successful funds that are out there are the simplest funds in the volatility space,” Davitt said in an interview. “We want to bring volatility solutions to chief investment officers that they can understand, that they can in turn explain to their boards.”

Millbank Dartmoor Portsmouth, which is based in Asheville, North Carolina, has lined up Novogratz, who heads cryptocurrency firm Galaxy Investment Partners LLC, and Richard Tavoso, a Galaxy director and former head of global arbitrage and trading at Royal Bank of Canada, as advisers.

“Institutions like farming out volatility strategies to specialists,” Novogratz said in an email.

Davitt headed equity derivatives for the Americas at Credit Suisse Group AG before going on to manage nearly US$1 billion at Harvest Volatility Management. The name of his new fund refers to three British prisons: Millbank, Dartmoor, and Portsmouth all incarcerated Michael Davitt, an agitator for Irish independence and land rights in the 19th century. Dennis Davitt says he may be a distant relative.

The firm plans to offer short-volatility strategies -- which profit as long as markets stay calm -- but also several others, eventually four or five. Davitt said MDP aims to start with an “iron-condor” fund, which uses complex options trades, and also a targeted-volatility strategy.

Davitt joined Malachite, a US$600-million volatility hedge fund founded by former Goldman Sachs Group Inc. partners, four months before the firm had to close. Malachite wasn’t alone. Allianz SE, the German insurance giant, had to shut its Structured Alpha fund. Banco BTG Pactual SA and LMR Partners also had to wind down strategies. Alberta Investment Management Corp. also suffered severe losses betting on market swings.

To avoid a repeat, Davitt said he’ll cap the level of borrowed money used to amplify a bet at 1.5 times, unless a client requests more.

“The short-volatility strategies that blew up really employed too much leverage,” he said.

Tavoso, who will play a more hands-on role than Novogratz in Davitt’s company, says these strategies “always had a place out there if run correctly and understood.”