Alternative Market Briefing

Lattice Capital's Dynamic Alpha Offshore Fund shifts strategy after significant losses

Thursday, August 15, 2024

Matthias Knab, Opalesque:

In a dramatic turn of events, Lattice Capital Management's Dynamic Alpha Offshore Fund, L.P. has reported substantial losses and announced a major strategy shift. According to a letter sent to Limited Partners on August 8, 2024, the fund experienced an estimated MTD loss of -40.7% and an YTD loss of -36.2% as of August 6, 2024.

The fund's management cited extreme market volatility, primarily driven by the unwinding of the Japanese Yen/USD carry trade and rising probabilities of accelerated interest rate cuts. The situation was further exacerbated by a worse-than-expected monthly nonfarm payrolls report that triggered the Sahm rule, signaling the potential onset of a U.S. recession.

Key points from the letter include:

The fund temporarily moved to cash and treasuries on August 6, 2024, to protect remaining capital.

An unprecedented overnight VIX spike of 181% between Friday's close and early Monday morning contributed to the losses.

Erratic and wide bid/ask options pricing, potentially due to issues with a key market maker, led to a rapid mark-to-market decline of -25% in the fund's positions.

In response to these events, Lattice Capital Management is proposing a significant strategy shift. The firm plans to rebrand the fund as the Dynamic Absolute Return Offshore Fund, L.P., implementing an enhanced options structure targeting 8-12% absolute returns. This new approach aims to better capitaliz......................

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