2019 October CAD

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-1.45% MTD

4.02% YTD

Dear Partners,

For the Month of October, the Caravel Capital Fund Ltd generated a -1.45% return.

The negative performance in October was primarily attributable to the portfolio’s Merger Arbitrage allocation. This strategy has been a core contributor to Caravel’s low volatility returns since inception. What we encountered in October is not typical for merger arbitrage. Typically, when Company A offers to buy Company B, it can do so in one of two ways. Company A can offer Company B a fixed amount of cash per share (a cash offer), or Company A can offer a fixed number of its own shares as compensation for Company B’s shares (a share exchange offer). In both cases, Company B’s shares trade at a discount to what Company A is offering. That difference presents a risk arbitrage opportunity. Caravel analyzes the risks to these offers and determines if the arbitrage opportunity is compelling. If the fund determines the market is mispriced, then it will invest with the expectation that the deal will close. In a cash offer, we have the benefit of tendering our shares and receiving cash, coupled with the risk the buyer may reconsider if market conditions change materially. This market risk is what we refer to as systematic risk, which has little to do with the fundamentals of the buyer or the target company, and everything to do with exogenous factors like the industry, economy, and political landscape. In a share for share deal, the arbitrageur buys shares of the target company's stock while shorting shares of the acquiring company's stock. When the deal is completed and the target stock is exchanged for the acquiring company’s stock, the arbitrageur keeps the difference generated from buying the target share below the value of the acquirer’s offer. This is a great way to generate event driven returns while being market neutral. We say market neutral because our short position significantly reduces or even eliminates the systematic risk that would negatively affect the long position.

When a merger arbitrage deal involving the acquirer’s shares as consideration breaks, it generates a loss for the arbitrageur from being long what goes down and short what goes up. The target company’s shares drop as arbitrageurs sell them while the acquirer’s shares rise as the arbitrageurs repurchase them. Within a fortnight, the Caravel Capital Fund Ltd incurred its first and second merger break since inception. After receiving all regulatory approvals and shareholder votes, the first deal was amended offering materially less to the target shareholders. The second broke for reasons we still don’t quite understand. The Australian target company’s management believed the industry was going through a

dramatic shakeup and did not want the added challenges of a merger. This deal had received all regulatory approvals, in addition to management’s conveyance of the substantial synergies, and their commitment to closing the transaction. At the time of writing, the target shares of the broken merger were still halted which is normal for Australian companies. We expect this to cost the fund 100 bps in November. We have materially reduced these positions and will look to exit them entirely as market distortions, caused by the deal breaking run their course.

To offer some reference, the fund has analyzed or invested in more than 400 mergers since inception. We continue to believe in the investment strategy going forward, and will continue to deploy funds into it, albeit conscious of the lessons we have learned in recent weeks.

We continue to pursue opportunities that generate returns uncorrelated to the general market, and welcome you to contact us to discuss any further questions.

We thank you for your continued confidence and capital

Caravel Capital