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pipeline. The number of managers and strategies provides diversification. The trading groups function as distinct business units. Historically, since Paloma's inception, there has been virtually no market correlation (0.05) to the stock market. Assets currently total approximately $1.6 billion. Peak assets were about $2 billion in 1998.

DIFFERENT STRUCTURE.

Because of this structure, it is unclear to some what Paloma is. Is it a fund of funds or a manager? Sussman says that in some respects similarities exist with a fund of funds: Diversification is provided; multiple managers are used, as are multiple strategies.

But many important differences exist as well. First, Paloma typically has exclusive relationships with its managers or maintains separate accounts. In contrast, a fund of funds has pooled accounts with its managers. Second, on the risk control front, Paloma has complete transparency on each transaction done by its managers. It knows in aggregate the concentration by sectors and positions. It also adds a portfolio overlay based on options volatility which uses a small percentage of capital but pays off geometrically. It identifies undervalued options and protects the portfolio when there are large moves. In contrast, most funds of funds receive only monthly returns and don't have the daily knowledge on concentration risk or the ability to manage risk.

In allocating capital, Paloma takes a bottom-up perspective. Capital allocation changes are made daily. "We are opportunistic. We take advantage of the ebb and flow of the markets. Opportunities disappear and reappear." A fund of funds, however, tends to take a top-down, macro approach, and usually a termination of capital will end the relationship between the manager and the fund of funds. In contrast, it is not uncommon that Paloma will reject a manager's trade or idea in the short term and let positions unwind but still maintain a relationship for when future opportunities appear.

All of Paloma's central back office, credit, legal, and stock loan activities are done in-house; about 175 people are housed at Paloma's headquarters and another 50 are located around the world. With a fund of funds, most managers maintain their own administration and financing, so there is no economy of scale achieved through centralized operations as there is at Paloma. So the conclusion is that Paloma is an