http://www.businessweek.com/news/2011-06-24/capstone-shuts-broker-dealer-to-focuson-volatility-hedge-fund.

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Capstone Shuts Broker-Dealer to Focus on Volatility Hedge Fund

Jun 24th, 2011 Investors are asking for more alignment from their managers and a simpler platform that is free of potential conflicts,

Britton said in a telephone

interview. We want to focus on our core expertise of volatility trading. History Britton, 37, started Capstone in 2004 when he bought the U.S. business of Mako
Global, a London-based trading company. The firms $1.1 billion hedge-fund business, Capstone Investment Advisors LLC, focuses on trading price swings, or volatility, across equity, bond and commodity markets.

Joe Lucas, President and COO in Jan 2011, previously a partner at Milwaukee-based Stark Investments.

http://www.fa-mag.com/news/certain-hedge-funds-cash-in-on-volatility-7962.html

Volatility Strategy Pays Off For Certain Hedge Funds

AUGUST 3, 2011

"There are so many ways to make money playing volatility, and volatility systems typically perform best when everyone else is confused." "We didn't have an exceptional first half of the year, but in the current environment, it was fantastic," said

Michel Dominice, co-manager

of Dominice & Co.'s $410 million Cassiopeia Fund, a volatility fund based in Geneva, Switzerland that gained about 10 percent through June.

Dominice's Cassiopeia Fund has made money every year since it

opened in 2004, posting a cumulative gain of about 147 percent. The fund manager doesn't expect trends in financial markets to get any clearer in August or September. Volatility may surge in October, as investors seek to exit money-losing trades before the end of the year and Europe's sovereign debt woes re-emerge, he said.

Paul Britton Volatility specialists that have profited this year

include Paul Britton's Capstone Investment Advisors LLC, which manages about $1.2 billion.

PERFORMANCE The firm's hedge fund gained 4

percent in July, bringing returns for 2011 to more than 10 percent, according to an investor who declined to be identified because the returns aren't publicly disclosed. Jeremy Heckerling, Capstone's general counsel, declined to comment. http://www.risk.net/hedge-funds-review/profile/2246892/interview-paul-britton-founderceo-capstone-holdings-group

Interview with Paul Britton, founder and CEO of Capstone Holdings Group
March 2010

History
In 2007 Paul Britton decided to transform his proprietary trading operation into an asset management business open to external investors. Three years on Capstone Holdings Group and its affiliates manage around $850 million across a range of volatility trading strategies.

Capstone Holding Group, the trading business Britton founded in 2004, specialises in volatility trading strategies that aim to profit from the way volatility is perceived and priced by market participants.

Britton says...

There are so many different permutations that have to be taken into account when you trade volatility. You have to think several moves ahead, he says. volatility trading remains a poorly understood corner of the investment universe Investors still struggle with the concept of volatility trading. Until recently volatility was not widely recognised as an asset class. There are still a lot of misconceptions in the investment community about how it can be traded, Volatility arbitrage could easily be a $25$30 billion strategy,

Stategies
Capstone uses what Britton calls a triangle approach to trading in which financial engineering, information technology and trading skills play an equally important role in the overall success of the investment process. Britton also recognizes the limitations of a traders intuition and instinct. Capstone relies heavily on quantitative techniques to generate investment ideas and employs cutting edge technology to execute them. The human element of trading is incredibly important, but it is not everything. Quantitative techniques help traders to make better decisions, while good information technology is needed to effectively execute those ideas. Our model is about getting all those elements to work together seamlessly. That is the key to what we do, he says. Britton says traders who rely purely on financial engineering to generate returns can leave themselves exposed to idiosyncratic risks, while those who trade on intuition alone are not getting the most out of the market.

Volatility traders like Capstone aim to profit from

fluctuations in the market by trading the spread between the implied volatility of an options contract and the future realised volatility of its underlier. Volatility can be traded as a directional strategy or as a relative value arbitrage play, says Britton. TO READ:
Trading the unknown Volatility traders like Capstone aim to profit from fluctuations in the market by trading the spread between the implied volatility of an options contract and the future realised volatility of its underlier. Options give the holder the right to buy or sell a security at a certain price by a given date. Implied volatility is one of the inputs needed to calculate the theoretical price of an option using a model such as Black-Scholes. Volatility trading strategies rely on the traders ability to accurately forecast the future volatility of a given security or index using mathematical models. An option is considered mispriced if its implied volatility is higher or lower than the estimated future volatility of its underlier. Volatility traders look to turn a profit by buying under-priced options and selling overpriced options against each other and their underliers. Volatility can be traded as a directional strategy or as a relative value arbitrage play, says Britton. In a long volatility trade, the trader purchases underpriced options and hedges out his exposure to the underlier to create a delta-neutral position.

The position yields a profit if the realised volatility of the underlier is greater than what is implied by the options price when the trade is executed. A short volatility trade is implemented by selling an overpriced option in a similar way. Volatility arbitrage involves simultaneously buying underpriced options and selling overpriced options on the same or related assets to capture the spread between the two. A volatility arbitrage strategy will generate absolute returns irrespective of whether volatility is rising or falling, says Britton. Britton firmly believes that with greater understanding institutional investors will come to view volatility strategies as a useful addition to their portfolios. Because of its negative correlation to markets, volatility investing can be used as a form of protection against downside risk. Volatility can also be traded as an absolute return strategy or as an alpha enhancer. When people think about volatility trading, they tend to think only of long volatility strategies that are negatively correlated to the markets. But volatility can also be traded as an absolute return arbitrage strategy. A short volatility strategy can be used to increase beta exposure to an underlying market or asset class, says Britton. There are so many different permutations to volatility trading. It can be a diversifier, an alpha generator or an insurance policy, depending on how it is traded, he adds. The fastest growing part of Capstones business is a product known as Capstone Protection Portfolios, or CPP, which is designed to help pension funds manage their tail risk. With a CPP, Capstone employs volatility strategies to create a

return stream that is negatively correlated to other investments in a clients portfolio. CPPs are customised for each client and are funded at a fixed annual rate. Capstone uses that sum to buy as much volatility protection as possible for the portfolio using options strategies. Britton describes CPP as portfolio insurance. It is like life insurance, he says. If you are willing to spend $1,000 annually, that buys you a certain amount of life insurance. Allocating a fixed amount of capital to CPP will buy you protection against a certain level of volatility in the market. Institutional clients are increasingly aware of the need for some form of protection against large-tail events, says Britton. You wouldnt drive a car without car insurance or own a home without home insurance, but people run large investment portfolios with no such protection. With the CPP, we use volatility strategies to provide clients with protection against downside risk, says Britton.
http://www.bloomberg.com/news/2010-09-20/ex-capstone-investment-trading-headyashar-to-start-volatility-hedge-fund.html

Ex-Capstone Investment Trading Head Yashar to Start Volatility Hedge Fund

Stephen Yashar, the former global head of trading at New York-based Capstone Investment Advisors LLC, plans to start a hedge fund focusing on options contracts. Cosyne Capital Management LP, based in Stamford, Connecticut, will begin

trading next month, Yashar said today in an interview. The hedge fund will use options to bet that stock price swings will increase or decrease, he said. There are a lot of idiosyncratic opportunities in the single-stock space, especially with the increase in activity in corporate mergers and acquisitions and special situations, said Yashar, 45. He declined to say how much money the firm will have at the start.