(Reuters) – Abydos Capital, a new hedge fund run by a former partner at one of London’s most high-profile oil investors, is worried about a potential military strike against Iran and plans to use options to protect his portfolio.
Jean-Louis Le Mee, Chief Investment Officer of Abydos, told Reuters he thinks there is a 25 to 50 percent chance of an Israeli strike against Iran’s nuclear capabilities, an act that would likely send stock markets tumbling and drive up oil prices, hitting hedge funds that hadn’t protected their portfolios.
Le Mee, one of the first hedge fund managers to discuss such a strategy, said he was planning to use options to profit from a spike in oil prices and a fall in equities via the S&P 500 index .SPX if Iran was attacked over its nuclear programme.
“There’s a high chance that something will happen either this summer in June/July or after the U.S. elections,” said Le Mee, whose former firm BlueGold made headlines in 2008 by calling the peak of the market. “If talks break down, then the Israelis could do something very quickly.
A typical hedging policy could see a fund buy call options, the right to buy at a certain price, on an asset it expects to rise, and buy put options, the right to sell at a predetermined price, on assets it expects to fall.
Le Mee is also cautious about economic conditions and believes markets are too relaxed about slower growth in China and the potential for more shocks from the European debt crisis.
“I’m very cautious. I expect more downside,” he said, adding he would not be surprised to see a 7-8 percent fall in the S&P index. “The situation in Europe is very worrying.”
In general, the fund would plan to spend a small proportion of fund assets on option premiums every year, which would pay for themselves if the market saw at least two violent corrections in that time span.
Protection using options will be key to the success of the fund, so a market slide does not force it to liquidate small to mid-cap shares and miss out on developments expected to boost their value. Click the Reuters logo for the entire story..