For the month of February the Caravel Capital Fund Ltd was up 1.79%.
The fund was very active during the month identifying new ideas and exiting those that reached our targets. Returns were generated in convertible arbitrage, risk arbitrage, warrant arbitrage and relative value spread trades. We estimate the portfolio turned over 100% of its capital during the month.
We would like to highlight our merger arbitrage strategy this month to help explain why we are experiencing , better returns than our peers. During the month, the Fund bet against the likelihood that a merger would be consummated as easily as expected. We accomplished this by shorting the target company’s shares and buying acquirer’s shares. This is the reverse of how one invests in a traditional merger arbitrage deal. Specifically, we felt that the spread at 4 cents between US-based Newmont Mining shares (the acquirer) and Goldcorp shares (the target company) was too tight to account for all of the possible risks. The market was not factoring in possible delays or challenges by regulators and other suitors. Knowing that Barrick Gold had previously tried to merge with Newmont, we felt it was reasonable that Barrick Gold could make a disruptive bid for Newmont. Based on this, we shorted the merger spread with a risk of losing 4 cents per share and a possible upside of $4.00 per share if the Newmont/Goldcorp deal fell apart. As sure as our day starts with coffee, Barrick Gold made a hostile bid for Newmont to scuttle the Goldcorp deal. Our spread went from 4 cents to 80 cents and we unwound the trade. Coincidently, Glen and I were attending the BMO Mining conference during this drama, where both companies presented. It was clear from these presentations that Barrick’s hostile offer was really a backdoor invitation to create a joint venture with Newmont’s Nevada project to save both companies billions. Predicting this would be a reality; we stepped back into the trade and went long the original deal at 80 cents while the two giants worked out their joint venture. The spread now sits at 8 cents and we have exited again. This is the second time in as many quarters we have shorted deals that have experienced disruptions and have yielded outsized returns for the fund. More proof that markets present opportunities if you are prepared to look at things unconventionally.
The fund will reopen on April 1st and accept $15 million in new capital. We remain the largest investors of the fund and are confident that it will continue to produce 20% plus returns. We remain committed to our promise that once the fund exceeds $100MM of assets, we will no longer accept new capital and will begin distributing capital back to our partners while reinvesting our returns and fees.
To our valued partners, we thank you for your confidence and capital.
Glen and Jeff
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