Two former designers of sports cars and fighter airplanes have formed the hedge fund Solytix Capital, which focuses on quantitative analytics.

Stephen Longo and Andrew Poe Borden, structural designers at General Motors Corp. and Lockheed Martin, respectively, said the quantitative hedge fund's name was born out of combining the words "solution" and "analytics."

Solytix is run by fund manager and CEO Borden, who is based in Santa Monica, Calif. Longo, who assumes the role of chief strategist and chairman, works in Bethpage, N.Y.

The partners met at Stanford University's graduate school more than 25 years ago while they were both studying engineering. Longo specialized in automobile design and Borden focused on aerospace, which eventually brought him to the famed Skunk Works, where he was senior stress engineer.

After seven years at Lockheed designing F-22 fighter airplanes, Borden went back to school to study business. He earned an MBA from The Wharton School of the University of Pennsylvania before embarking on a career on Wall Street.

Most recently, Borden was at Goldman Sachs where he was vice president in fixed-income, currencies and commodities strategy and derivatives. Prior to Goldman, he held various risk management and trading positions at several other investment banks including Morgan Stanley and Deutsche Bank.

The duo hatched their plan to launch a hedge fund two years ago. However, they are not relying on their prior knowledge of automobiles or of the aerospace sector.

"We're not analyzing those types of companies," Longo said, adding that the new fund's strategy is purely quantitative analytics. "It's difficult to rely on someone's judgment to be consistently good."

Many quantitative hedge funds suffered losses in August 2007 due to the subprime crisis and market volatility. The quant funds that blew up over the summer of 2007 were leveraging at 8-1 or 50-1, and Longo said that's why many of the blowups happened in a day.

"Eventually strategies get old and decay and managers have to continually adapt and change them," he said. Longo said Solytix plans to do things differently.

"We don't expose investors to margin calls," he said, adding that the nascent hedge fund employs a variety of strategies.

The fund's six strategies include ones based on volatility in the S&P 500 and an exchange-traded fund strategy. Risk management is a major part of the fund's operations. Solytix runs vigorous, risk-reward tests on each strategy, and investments are held for the short-term, which could be one day or two weeks at the most, he said.

Artificial intelligence plays into their strategies as well. The fund uses mathematical algorithms which mimic the way the brain thinks, and also help to uncover patterns that persist in the market, according to Longo, who traded his own stocks while he was at GM.

Solytix charges a 3% management fee and a 20% incentive fee. The minimum to invest is $1 million. Most hedge funds charge a 2% management fee and a 20% incentive fee.

Launching a hedge fund is not an easy feat, and it has taken Solytix two years to get up and running. In that time, Longo has been vetting strategies and trading stimulated accounts using live data.

"It's always challenging to start any type of business," said Aaron Vermut, chief operating officer of prime brokerage Merlin Securities. Many legal fees are involved and over the last five years, fees have increased due to more demand. Vermut said other considerations for anyone starting a hedge fund include picking an administrator and prime broker, setting up needed infrastructure and raising money.

Typically, a hedge fund has to register in a state when it has more than five investors based in that particular state. Solytix is registered in California and Tennessee and plans to register in New York soon. Hedge funds are required to register with the state if they are managing less than $25 million, but if they are managing more than $30 million, funds have to register with federal regulators.

Solytix's co-founders are still looking for investors and aim to get the word out about the fund.

"Our goal is to have $100 million by next year," Longo said. The fund's first investors will likely be high-net-worth individuals and fund-of-funds, but Longo hopes to eventually attract institutions.

"Unless a fund is over $100 million, institutional investors are going to have a hard time investing in it, and this makes getting to the $100 million mark very difficult," he said.

There are other routes to go to have a hedge fund launched in a quicker time frame, including asking investors to help with start-up costs or partnering with a seeder to provide capital and marketing help.

"We created the infrastructure and got the hardware and didn't put that cost on investors," Longo said. "It's very time consuming and everything has to be done correctly."

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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