SAN FRANCISCO - A new limited partnership is betting that the fortunes of market makers will provide a hedge against stock market risk.
MDNH Partners, San Francisco, is seeking to raise an initial $5 million to $10 million for a Market Maker Fund, with a minimum investment of $500,000, by year-end 1997. Pension funds might comprise up to 30% of the total. In subsequent closings, the fund might raise up to $50 million.
The fund's general partner is Douglas Engmann, president of Sage Clearing Corp., San Francisco, a clearing agent for stock specialists and options market makers. The fund will begin investing shortly, with the general partner's own capital.
The partnership will act as a fund of funds, investing in a mix of private funds that finance specialist firms on stock exchanges and market makers on options exchanges.
Mr. Engmann said both industries experienced a consolidation after the 1987 stock market crash, as investors, led by institutions, demanded greater liquidity.
"With the nervousness in the market, people at the casino wouldn't mind owning a part of the casino," he said.
Mr. Engmann raised a fund in 1988 to finance mergers and joint ventures of small market-making firms with successful track records. The new fund will invest among the 40 to 50 funds out there doing the same thing.
"Institutions don't want to spend the time and effort," investing in such small funds individually, he said, adding a fund of funds provides more diversification.
He said these are "market neutral-type investments with returns independently correlated with the market. The business of market making is not highly correlated with the market. It's correlated to volume."
He said even in the event of a sustained bear market, with a sharp drop in volume, returns of the fund "would be lower but not negative."
Mr. Engmann's first fund, which provided financing to these firms, earned an average annual 20% from the end of 1988 through Nov. 30, 1996.