Institutional Investor's Alpha Magazine - March 2008 - (Page 29) Finkelstein are building that toolbox in the form of the firm’s Gallery QMS Fund. The multistrategy fund seeks to trade well in different market conditions by applying an evolving suite of strategies to many asset classes. Sogoloff and Finkelstein are currently researching four main investment areas — credit and capital-structure arbitrage, equities, fixed-income arbitrage and reinsurance. Gallery was scheduled to launch in January, but general market risk has led to a delay. Although Horton Point has been trading with its own capital, the opening is on hold pending final talks with investors. Sogoloff says that to achieve “complete diversification,” the portfolio must have several hundred million dollars in assets. “We are finalizing an initial commitment from a strategic investor and hopefully will be able to begin trading shortly,” he adds. Born in Kharkov, Ukraine, Sogoloff emigrated to the U.S. in 1980. After earning an engineering degree and an MBA from Columbia, he began his career as a market maker and convertible bond trader with London- and New York–based Quadrex Securities Corp. He later traded convertible bonds at the New York office of London’s Baring Securities and for Chicago-based LIT America. In 1993, Sogoloff co-founded Alexandra Investment Management with Mikhail Filimonov. The New York hedge fund firm focused on convertible arbitrage before branching out into other strategies early this decade. Sogoloff says he left Alexandra in the fall of 2006 because he wanted to pursue something completely new. He started Horton Point that October with Finkelstein. Finkelstein, who also grew up in Kharkov, has a Ph.D. in theoretical physics from New York University and a master’s degree in the same discipline from the Moscow Institute of Physics and Technology. Before joining Horton Point as chief science officer, he was head of quantitative credit research at Citadel Investment Group in Chicago. Most of the 12 Ph.D.s at Horton Point’s Manhattan office are researching investment strategies and ways to apply scientific principles to finance. The firm runs what Finkelstein, 54, describes as a factory of strategies, with new models coming on line all the time. “It’s not like we plan to build ten strategies and sit on them,” he says. “The challenge is to keep it going, to keep this factory functioning.” Along with his reservations about statistical arbitrage, Sogoloff is wary of quants who believe the real world is obliged to conform to a mathematical model. He acknowledges the difficulty of applying scientific disciplines like genetics or chaos theory — which purports to find patterns in seemingly random data — to finance. “Quantitative work will be much more rewarding to the scientist if one concentrates on those theories or areas that attempt to describe nonstable relationships,” he says. Sogoloff sees promise in disciplines that deal with causal relationships rather than historical ones — like mathematical linguistics, which uses models to analyze the structure of language. “These sciences did not exist five or ten years ago,” he says. “They became possible because of humongous computational improvements.” Photo by Chad Batka for Alpha However, most quant shops aren’t exploring such fields because it means throwing considerable resources at uncertain results, Sogoloff says. Horton Point has found a solution by assembling a global network of academics whose research could be useful to the firm. So far the group includes specialists in everything from psychology to data mining, at such schools as the Beijing Institute of Technology, the California Institute of Technology and Technion, the Israel Institute of Technology. Sogoloff tells the academics that the goal is to create the Bell Labs of finance. To align both parties’ interests, Horton Point offers them a share of the profits should their work lead to an investment strategy. Scientists like collaborating with Horton Point because it combines intellectual freedom with the opportunity to test their theories using real data, Sogoloff says. “You have experiments that can be set up in a matter of seconds because it’s a live market, and you have the potential for an amazing economic benefit.” As he seeks to right his faltering hedge fund, Thales’s Fludzinski could stand to reap such rewards sooner rather than later. But he’s not losing sight of his quest to explain why markets do what they do — a goal that may require a leap of imagination. Just as quantum mechanics and the theory of relativity shook up the world of physics, Fludzinski says, “finance needs a similar out-of-the-box insight — something that changes the way we look at things.” “It’s important to cast your net as wide as possible,” says Dimitri Sogoloff, CEO of Horton Point. MARCH 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 29
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