For the month of November the Caravel Capital Fund Ltd was up 0.02%
The last two months were a risk off exercise. In November the fund generated gains in risk arbitrage and in our short stock versus long warrants/convertible bond strategies. Our losses came almost entirely from reducing the size of risk sensitive positions. We would love to say we would have been up about 1.50% had we not done this, but we would also have to tell you that we didn’t follow our philosophy.
Risk changes daily but it can also take on a trend. Our job is to identify and assess changing trends while looking at opportunities. For the past 3 months we have been watching the systematic risk (broad economic and market risk) rise significantly. We have adapted to this reality by demanding a higher risk tolerance from our investments. Since early October WTI Crude Oil has fallen from $76 per barrel to $50 per barrel, as this trend developed we initiated a stress test across the Fund’s oil exposure. One investment had the potential to inherit substantially elevated risk if this price trend continued; we took action and exited the position. As painful as it was, we are certain it was the right thing to do, no question. We now sit comfortably with our oil exposure across the portfolio at the prevailing WTI prices. When an investment cannot withstand what we believe are the coming market pressures, we reduce the position or exit entirely. To put it in context, we have reduced our capital deployed by 75% since August when our investments were at full capacity. Our intent is to explain to our partners why we have not obtained our targeted 1% to 2% return per month. If you look at our Christmas card, the chart tells the tale. Our performance tapers when risk shows up and returns when risk abates. Our current perspective tells us we are very close, perhaps 3-6% away from a compelling risk/reward market value.
As is our stated policy we disclose all insider transactions in the fund. Jeff Banfield redeemed 3% of his investment in the fund as of month end, which eliminated his Canadian dollar holdings.
From all of us at Caravel Capital enjoy your holidays and time with friends and family. As always, we thank you for your confidence and capital.
Jeff and Glen
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