Capstone Investment Advisors LLC (Capstone) is an American

investment management Investment management (sometimes referred to more generally as financial asset management) is the professional asset management of various Security (finance), securities, including shareholdings, Bond (finance), bonds, and other assets, such as r ...

firm headquartered in New York City with additional offices in Europe and Asia. The firm specializes in

volatility arbitrage In finance, volatility arbitrage (or vol arb) is a term for financial arbitrage techniques directly dependent and based on volatility. A common type of vol arb is type of statistical arbitrage that is implemented by trading a delta neutral po ...

which involves volatility and derivatives trading in various markets.

Background

Paul Britton, a native of

Epsom Epsom is a town in the borough of Epsom and Ewell in Surrey, England, about south of central London. The town is first recorded as ''Ebesham'' in the 10th century and its name probably derives from that of a Anglo-Saxon settlement of Britain ...

in the United Kingdom graduated in 1994 from the

London Metropolitan University London Metropolitan University, commonly known as London Met, is a public university, public research university in London, England. The University of North London and London Guildhall University merged in 2002 to create the university. The Un ...

and worked for Saratoga Limited, an options trading firm of

Vincent Viola Vincent "Vinnie" Viola (born 1956) is an American billionaire businessman and U.S. Army veteran. He was for several weeks President Donald Trump's nominee for United States Secretary of the Army, before withdrawing from consideration. Viola i ...

. He was a trainee trader who traded options on the

London International Financial Futures and Options Exchange The London International Financial Futures and Options Exchange (LIFFE, pronounced 'life') was a futures exchange based in London. In 2014, following a series of takeovers, LIFFE became part of Intercontinental Exchange, and was renamed IC ...

. During the

1997 Asian financial crisis The 1997 Asian financial crisis gripped much of East Asia, East and Southeast Asia during the late 1990s. The crisis began in Thailand in July 1997 before spreading to several other countries with a ripple effect, raising fears of a worldwide eco ...

and

1998 Russian financial crisis The Russian financial crisis (also called the ruble crisis or the Russian flu) began in Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the Russian rouble, ruble and sovereign default, defau ...

, he profited significantly. He was influenced by Thomas Peterffy and Timber Hill who were among the first to embrace

algorithmic trading Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...

and its use in global volatility. In 1999, he, David Segel and several partners performed a

management buyout A management buyout (MBO) is a form of acquisition in which a company's existing managers acquire a large part, or all, of the company, whether from a parent company or individual. Management- and/or leveraged buyouts became noted phenomena of 19 ...

of Saratoga and changed its name to Mako Global Derivatives. In 2001, Britton moved to the United States to establish its US operations. Shortly after, Britton witnessed the

September 11 attacks The September 11 attacks, also known as 9/11, were four coordinated Islamist terrorist suicide attacks by al-Qaeda against the United States in 2001. Nineteen terrorists hijacked four commercial airliners, crashing the first two into ...

from the New York Mercantile Exchange building which was slightly damaged from the attacks. In 2004, Britton performed a management buyout of Mako Global Derivatives' U.S. operations establishing a Capstone as a new independent entity. It was originally established as a

proprietary trading Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using customer funds) to make a profit ...

firm but in 2007, it started accepting outside capital and changed to a

hedge fund A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...

structure which would focus on volatility strategies. In 2007, Capstone also established a

broker-dealer In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and ...

entity named Capstone Sales Advisors (renamed to Capstone Global Markets LLC in 2009) but it was closed on June 30, 2011. Due to the

Madoff investment scandal The Madoff investment scandal was a major case of stock and securities fraud discovered in late 2008. In December of that year, Bernie Madoff, the former Nasdaq chairman and founder of the Wall Street firm Bernard L. Madoff Investment Securities ...

that involved broker-dealers, investors wanted a platform free from

conflict of interest A conflict of interest (COI) is a situation in which a person or organization is involved in multiple wikt:interest#Noun, interests, financial or otherwise, and serving one interest could involve working against another. Typically, this relates t ...

so Capstone closed its broker-dealer business to focus on its investment business. In October 2007, Capstone acquired a portfolio of distressed derivatives from RV Capita which was undergoing difficulties due to the

2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...

. During the

, Capstone was well positioned. It made strong returns in January 2008. As a result, more investors put more cash into the firm. At this time, the firm believed the VIX had a ceiling and would rarely go above 40. However the

Bankruptcy of Lehman Brothers The bankruptcy of Lehman Brothers, also known as the Crash of '08 and the Lehman Shock, on September 15, 2008, was the climax of the subprime mortgage crisis. After the financial services firm was notified of a pending credit downgrade due to i ...

led to the VIX going above 80 and the firm had to buy back its exposure at 65. As a result, Capstone made large losses and its assets shrank by several hundred million dollars. However the firm survived thanks to an investment from a big European client. In June 2013, Dyal Capital acquired a 20% stake of Capstone for $60 million. In August 2020, Navigator Global Investments acquired Dyal Capital's stake of Capstone. The remaining 80% of the Capstone is owned by its partners. According to ''

Financial Times The ''Financial Times'' (''FT'') is a British daily newspaper printed in broadsheet and also published digitally that focuses on business and economic Current affairs (news format), current affairs. Based in London, the paper is owned by a Jap ...

'', from 2007 to 2021, Capstone had an annual return of 7% This included a 20% gain in 2020 due to the

COVID-19 pandemic The COVID-19 pandemic (also known as the coronavirus pandemic and COVID pandemic), caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2), began with an disease outbreak, outbreak of COVID-19 in Wuhan, China, in December ...

allowing the firm to acquire options for a lower price. In 2020, Capstone

tail risk Tail risk, sometimes called "fat tail risk", is the financial risk of an asset or portfolio of assets moving more than three standard deviations from its current price, above the risk of a normal distribution. Tail risks include low-probability ev ...

funds returned 280%. Capstone also benefitted from the stock volatility of the

GameStop short squeeze In January 2021, a short squeeze of the stock of the American video game retailer GameStop and other Security (finance), securities took place, causing major financial consequences for certain hedge funds and large losses for Short (finance), ...

. In August 2022, Capstone opened an office in Hong Kong with plans to allocate $1.5 billion of risk capital to Asia by the second quarter of 2024. In May 2023, it was reported that Capstone allocated more risk capital to Japan than ever before. This was based on the

Bank of Japan The is the central bank of Japan.Louis Frédéric, Nussbaum, Louis Frédéric. (2005). "Nihon Ginkō" in The bank is often called for short. It is headquartered in Nihonbashi, Chūō, Tokyo, Chūō, Tokyo. The said bank is a corporate entity ...

's decision to maintain negative interest rates which Capstone believed would benefit its volatility trading strategy due to the uncertainties created. Britton has stated while Capstone is currently focused on Japan at the moment, it will move to China later on. Capstone is headquartered at

7 World Trade Center 7 World Trade Center (7 WTC, WTC-7, or Tower 7) is an office building constructed as part of the new World Trade Center (2001–present), World Trade Center in Lower Manhattan, New York City. The tower is located on a city block bounded by Gr ...

. The experience of 9/11 and seeing the city rebuild itself was the reason Britton decided to take a long lease for Capstone in that building. Capstone's office in London is its second biggest office with 70 out of 210

portfolio manager A portfolio manager (PM) is a professional responsible for making investment decisions and carrying out investment activities on behalf of vested individuals or institutions. Clients invest their money into the PM's investment policy for future gr ...

s operating out of it.

References

External links

* {{authority control 2004 establishments in New York City Financial services companies established in 2004 Hedge fund firms in New York City Investment management companies of the United States Privately held companies based in New York City