The Caravel Capital Fund Ltd was -1.54% for the month of June.
The past month was the most challenging in the brief history of the Caravel Cad Fund. We seemed to be in the
wrong spot regardless of what we tried to do. As a result of capricious trade policy in Washington, we covered the market short we had initiated for protection against what we believed would be a material correction. Days after this, German and Chinese economic reports were released showing economic activity slow significantly and leading to a 6% pull back in markets. We also had to exit a large merger arbitrage position due to prohibitively high charges to borrow the acquirer’s stock at a material loss to the fund. In addition to this we have been battling with excessive costs on most of our short stock positions. The cost to borrow shares we are short effectively cost us 1.0% this month. As a result, we continued to reduce our exposure in names that fit this unappealing profile.
This may be us letting off a bit of steam... but we are strongly of the view the securities lending business has become the main revenue generator for the equity capital markets divisions of the bank owned dealers. We are regularly watching the cost of borrowing the shares we short increase to 10%, 20% and sometimes 50% per annum. By the time the rates hit that level markets, have reacted and we have a difficult time unwinding the strategy. In our 50 combined years of investing we have never seen the kinds of charges we are experiencing except in cases of bankruptcy. We are focusing on finding better ways to manage this cost.
Your team at Caravel Capital continues to work hard to identify opportunities that provide attractive risk adjusted returns.
Jeff and Glen
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