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Deepak Gulati: Focusing on Equity Volatility

What sets apart Gulati’s new hedge fund firm, Argentière Capital, from the rest is how it manages risk.

­A handful of hotshot proprietary traders from investment banks have struck out on their own in recent years, setting up hedge fund firms in response to new regulations designed to stifle that kind of risk-taking at U.S. banks. But only one can say he has hired a former White House chief of staff to run part of his business.

Such is the star power of Deepak Gulati, founder of Zug, Switzerland–based Argentière Capital and former global head of proprietary equity trading at JPMorgan Chase & Co. In April, Gulati hired William Daley — a scion of the famous Chicago Democratic family and President Barack Obama’s chief of staff from 2011 to 2012 — to run its U.S. business. Daley, who will be based in Chicago, previously served as chairman of JPMorgan Chase’s Midwest operations.

Daley never met Gulati at JPMorgan, but word of the trader’s talent circulated through the bank, particularly after Gulati and his team earned an approximately 50 percent gain in 2008, a year when the average hedge fund lost 20 percent, according to people familiar with Gulati’s returns. His personal integrity also attracted notice. James (Jes) Staley, a close friend of Daley’s and former head of JPMorgan’s investment bank, regarded Gulati as not only a talented trader but a person who had negotiated his exit from the bank with class. Daley, who had been looking to join a start-up, met with the soft-spoken manager at Staley’s suggestion and was similarly impressed.

With the launch of Argentière last year, Gulati entered into a new, and undoubtedly riskier, stage of his career. When the Volcker rule — part of the Dodd-Frank Wall Street Reform and Consumer Protection Act — effectively made it illegal for banks to run large proprietary trading operations, several ace traders went out on their own, attracting much fanfare and a great deal of assets. But a couple of these firms have already shuttered after posting mediocre returns. With endorsements from the highest echelons of finance and government, however, Gulati appears to be better placed than most to survive the shift.

Gulati, whose complex equity relative-value trading strategies focus on equity volatility and seeking inefficiencies to exploit across the spectrum of equities, generated annualized returns of about 19 percent from 2007 through 2012. He joined JPMorgan’s London office in 2003 to head index volatility trading for the bank’s new proprietary equity-derivatives-trading group. Gulati was the best-­performing trader for the group from 2003 to 2006; he rose to become head of global proprietary equity trading for the bank, a role he held until he left to start Argentière.







Gulati credits his former employer for his seamless transition. Apparently, the feeling was mutual. Staley says such negotiations can be contentious but Gulati was honest and fair throughout the process. “He was really a first-class individual to deal with,” says Staley, now a managing director at New York–based hedge fund firm BlueMountain Capital Management. “I never felt like I had to think twice about what he was saying to make sure we weren’t missing something.”

Thanks to his standing in the bank, Gulati was able to start building Argentière long before he left. He spent 18 months working on the launch while continuing to trade within JPMorgan.

Unlike many hedge fund managers who move to Switzerland, Gulati wasn’t just seeking an advantageous tax structure. Although he was born in India, he spent most of his childhood in Switzerland — his firm takes its name from a ski resort across the border in France where he vacationed with his family. Gulati, 36, is a son of doctors, but he followed his older brother, Nobel, into finance. Nobel Gulati is chief operating officer of New York–based hedge fund firm Two Sigma Investments.

At Argentière, Gulati is running exactly the same strategy that he managed at JP­Morgan. Although the strategy does not have a tail-risk component, Argentière will tend to do well in down markets, as Gulati’s return in 2008 demonstrated. The Argentière Master Fund, which manages $500 million, has three primary strategies: volatility, event-driven and quantitative long-short equities.

Gulati notes that what sets his firm apart is not its investing ideas but how it puts the trades on and manages their risk. “We believe our edge is in using sophisticated ways to structure and risk-manage those investments, including the use of derivatives,” he adds.

Staley notes that Gulati faces challenges in launching a long-volatility strategy during a time of historically low market volatility. Indeed, the fund is flat so far this year, according to people familiar with its returns, and was up about 2 percent in its first, partial year of trading, from June through December 2013.

But Staley says volatility will inevitably revert to the mean — and when it does, he expects Gulati to do very well. “He has all the characteristics to be a very good investor,” Staley says. “He has conviction, but he is willing to hedge himself.”

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