Interview: Mint Tower Capital - a hedge fund directly accessing the exchange to get the whole of the European Equity Options

Cornelius Müller: Mint Tower Capital is specialized in arbitrage strategies. Can you explain what those strategies are?

Bart Bijmolen: The strategies Mint Tower Capital trades are volatility and convertible arbitrage resulting in one unique synergetic combination.

Cornelius Müller: Looking at the volatility arbitrage strategy, how does it work in detail?

Bart Bijmolen: This is a relative value delta neutral strategy involving options and their underlying across markets and instruments. Because of the issuance of structured products, demand/supply and events like earnings, take-overs, for example options, are constantly overpriced or underpriced across strikes and expirations. Due to these mispricings several kinds of relative value opportunities arise.

Cornelius Müller: How do you then realize the gains?

Bart Bijmolen: By actively trading in options and the underlying shares or indexes, Mint Tower Capital can take advantage of differences between the implied volatility of the option and the forecast of future realized volatility of the option’s underlying. But there are also other opportunities like dispersion trading, trading single stock volatility against indexes, pair trading, relative value arbitrage between the volatility of two indexes or term structure trading, long/short trade depending on relative cheapness/expensiveness of volatility across term structure.

By analyzing over 200 most liquid underlyings and indices on a daily basis with the help of various statistical techniques like regression analysis, inaccuracies in volatility are exposed. When judged attractive, trades are setup and actively managed to capture and therefore realize the discrepancies.

Cornelius Müller: …and for the Convertible Arbitrage strategy?

Bart Bijmolen: Since every convertible bond comes with its own prospectus, each of these bonds is unique. After carefully reading the documentation and conducting fundamental research, we set up trades with a favorable risk/reward profile. By buying convertible bonds and subsequently hedging stock, currency and interest rate risk, we are able to structure positions with cheap optionality.

The gains can be generated from a wide variety of sources. For instance, in some cases the imbedded call option in the convertible is undervalued compared to the volatility of the stock. In other instances, opportunities could arise from specific clauses in the prospectus, for example in the case of a takeover. We also find a lot of arbitrage opportunities between mandatory convertibles and the listed options market. In these cases we capture the spread between the two.
The portfolio has a low exposure to credit risk as the positions consist mainly of mandatory convertibles and convertibles which are deep in the money.

Cornelius Müller: Within those strategies, how do you make use of Eurex Exchange’s products?

Bart Bijmolen: At Mint Tower Capital we use a whole variety of Eurex products. For trading our strategies we actively use listed equity and index options besides futures on dividends, single stocks and indexes that are very easy to trade. But also for hedging purposes for example we use interest rate futures ( BOBL) to hedge interest exposure.

Cornelius Müller: What are the risks and what is your track record so far?

Bart Bijmolen: The risks are pretty limited as long as markets move. When markets don’t move anymore, then it becomes challenging for the manager to profit from the small discrepancies that normally exist during the day. About our track record, since inception in October 2010 we realized 44.91% net return that’s 7.70% annualized. We never experienced a negative year, but what makes us really proud is that we achieved these returns with a volatility of 3.30% and a Sharpe ratio of 2.32.

Cornelius Müller: You are experts in Equity Options, looking at the competition between exchanges on single names: how do you see the liquidity in single Equity Options between the exchanges?

Bart Bijmolen: Most exchanges provide a good liquidity but mainly on their domestic indexes, but Eurex Exchange also supplies good liquidity on other markets such as Italy, Spain and the Netherlands, besides their home market.

Cornelius Müller: What was your key driver to become a direct Eurex Trading Participant?

Bart Bijmolen: Key drivers are the easy to trade broad variety of products that are being traded on Eurex and the liquidity in these products. Besides variety and liquidity the faster connectivity and compatibility with our trading systems is also an important aspect. Last but not least cost efficiency, from a trading perspective but also during expiry on exercises and assignments.

Cornelius Müller: Eurex Exchange has introduced Variance Futures. What do you think of the futurization process and how would these products fit in your strategy

Bart Bijmolen: We think that’s very interesting, Eurex is very innovative in creating and launching new products, we are looking at the Variance Futures how to trade them but first of all how they will flow into our risk systems so we can properly manage them, the fact that they are listed on an exchange is very helpful and makes it easy to trade also for smaller companies.

Cornelius Müller: Thank you, Bart.

Mint Tower Capital Management
Founded in 2010 by four partners who chose the name in reference to the Mint Tower in Amsterdam, Mint Tower Capital offers a unique opportunity to invest in strategies which require specialist knowledge, experience and infrastructure which are generally accessible only to institutional investors.

Bart Bijmolen, born in 1970 in Vlaardingen, The Netherlands, went into the business via a traineeship at ABN Amro Bank N.V. where he later became a Senior Trader and Head Asian Indices Equity Volatility. In 2009 he joined the Royal Bank of Scotland as an Executive Director responsible for German and French volatility books. In 2015 he joined Mint Tower Capital Management as Head of Sales.