Trying to build on his fund’s remarkable returns over of the past two years, Starr Capital Management’s Eric Starr said he is in the beginning stages of starting a larger, second fund. Certainly that as yet unnamed fund will have its work cut out for it in matching the $25 million StarrCap International Fund’s 143% return this year.

Moreover, StarrCap’s performance is framed against a backdrop of lackluster returns in HedgeFund.net’s multistrategy index, where the 159 funds are up 1.98% this year. Last year, the index was up 14.60%.

Mr. Starr said his new fund would be “a classic long-short hedge fund, buying and shorting Japanese equities.” He said it would use a proprietary quantitative model he has developed. Unlike his current fund, where he waits days for the proper conditions to emerge for a trade, he said the new fund would be more active and seek “the classic, stable hedge-fund return level of 15% or so.” He declined to name a target level of capital for launching the fund but did note: “Suffice to say, the strategy will accommodate more than $25 million.”

The StarrCap International Fund’s success has been what Mr. Starr called “the ability to identify and exploit event-driven pricing anomalies in Japanese stocks and bonds.” He declined to name what specific stocks or futures he trades, or even what the anomalies are that he seeks to exploit.

The key to this strategy is to both use leverage – borrowed capital – to increase the size of the position, as well as identifying targets that have enough stock outstanding (known as a stock’s “float”) to be able to sell short a given percentage of the long value as a defensive measure. Mr. Starr said he then holds the position until the stock returns to its normal value.

Multi-strategy hedge funds encompass a variety of different investment management strategies within a single portfolio.

For example, a single portfolio of $100 million might contain trades such as merger and statistical arbitrage, distressed debt and convertible arbitrage, high-yield bonds, and leveraged loans.

The strategy is growing in popularity, said the president of $1.4 billion hedge fund-of-funds Lyster Watson, Robert Watson. This is because it allows hedge fund managers to grow assets under a new fund’s “umbrella” where as many fund managers are rapidly approaching capacity constraints in individual strategies, such as distressed debt and convertible arbitrage.