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Muhr: now harvesting options
volatility on CSFB's farm
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Karlheinz Muhr is full of colourful ways to describe his
business. He is chairman and founding partner of Volaris Advisors,
which dubs itself an equity-options strategy firm. Essentially what
it offers is the ability, as Muhr puts it, "to harvest the
volatility of stocks which you already own".
His firm is at the forefront of putting volatility on the map as
an asset class. "If you ask people whether volatility is good or
bad, a liability or an asset, chances are that 90% of them will
tell you it's a liability and it's bad," he says. "But it can be
treated as an asset if you own the stock."
So this isn't about short selling, nor is it about playing the
market. It's about getting some extra return, or a "synthetic
dividend", as Muhr puts it, from something that you already
own.
Most of his clients - he has around $1.5 billion of assets under
management after just 18 months in full-time operation - are
high-net-worth individuals, trusts or foundations, although he does
have some money managers and even a couple of hedge funds on the
books.
His favourite way of explaining the concept is to compare it to
wine-making. "Imagine you've bought some land and property as your
weekend home. Later you find out you've got enough grapes growing
there to make a vineyard. You could continue to leave them to
wither and die each year, and lose out completely, or you could try
to make the wine yourself, but the chances are you'll end up making
vinegar. Or you employ a wine maker. Well it's the same principle
here. The stock is your land, the volatility the grapes. And we are
your winemaker."
One person who liked what he heard is Jeff Salzman, head of
CSFB's private-client services division, who started using Volaris
for some of his clients around six months ago. "In dealing with
Karlheinz and his team I realized that they articulate volatility
as an asset class as well as, if not better than, anyone."
In fact, Salzman liked them so much, he bought the company.
"They were able to win business from every single client we put in
front of them," says Salzman. "The market's been using options for
years to hedge equity risk, but usually in a relatively haphazard
way. What Volaris offers is systematic."
The basic premise to Volaris is pretty simple: clients decide
what kind of stock volatility they can tolerate, whether on the
upside or downside, and Volaris, using a web-based system it has
developed called Nova, helps them hedge accordingly.
"Let's assume IBM is at $80," says Muhr. "There are 150 or more
options which you could write, but which one or two make the best
sense? We can find that out in seconds." It's not meant to be a
strategy to lock in for the long term, but rather hedging decisions
are made to cover periods of 40 to 90 days, and are then
revisited.
Buying small is all the rage
This is the latest in a small series of deals that larger
financial institutions have made in recent months to get hold of
specialized capabilities they don't have in-house and which are
either too difficult, too expensive or too time-consuming to
build.
At the end of last year JPMorgan Investor Services bought Plexus
Group, a firm specializing in analyzing equity trading costs. It's
best known for its iceberg theory, which states that the explicit
cost of a trade is far outweighed by the implicit costs lurking
beneath the surface .
And early this year Banc of America Securities bought Vector
Partners, a portfolio-trading boutique. This was more a question of
the bank adding a service that it needs to compete but that would
take too long to build internally.
It's a trend that doesn't surprise Muhr. "It all goes back to
Clayton Christensen's book, The innovator's dilemma. It's much
harder to create the kind of things we are doing inside a large
organization. Now you're finding that independent financial
services firms founded in the last several years which incorporated
new, advanced technologies are now reintegrating as they look for
scale."
That's what drove Volaris into the arms of CSFB: the latter can
offer a large sales force to promote Volaris' product to the
high-net-worth individuals on its client list, as well as some
foundations and trusts. What helped Volaris's partners decide to go
to CSFB, though, was also the ability to continue to seek out
other, non-CSFB clients. "Volaris will exist within the
private-client group for marketing purposes, but it will also be a
separate asset-management group within that so that it will be able
to execute business for a variety of outside asset managers," says
Salzman.
There is one very obvious downside to the deal for Volaris,
though. As part of it Muhr and his team are moving down to CSFB's
New York offices on Madison Park. And that means Muhr will have to
give up his stunning view of St Patrick's Cathedral a mile and a
half up the road. But at least the restaurant options are
better.