2020 August CAD

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3.13% MTD

7.47% YTD

Finding Alpha

Dear Partners,

For the month of August the Caravel Capital Fund Ltd was up 3.13%.

Within investment circles, you hear the word alpha mentioned a lot.  Alpha measures the return that an investment portfolio generates above or below an index or other broad benchmarks.   However, just as important as alpha to a portfolio’s return is beta, or the portfolio’s relationship to the returns of the benchmark to which it is being compared. When beta is low (or zero), what you’re left with is often called pure alpha.

After a month like August when global indexes hit all-time highs and some had double digit returns, seeing a return of 3.13% for Caravel Capital Fund Ltd might concern you that our strategies are tied to the ups and downs of the broader market.  Last month we explained how different strategies contribute to our stable returns.  This month, we want to highlight how these strategies can generate excellent returns regardless of whether the market is up or down for the month.

Despite the strong returns of equity markets, our performance this month was materially a result of being short common stock.  When opportune, we will invest in the debt of viable businesses who over time have borrowed too much money.  From our years of experience, we are able to determine if companies can fix the problem by asking some debt holders to exchange their debt for new common shares and allow the restructured company to emerge with a profile that is attractive to fundamental investors.  These positions require a fundamental deep dive into the underlying business and its cash flows in order to gain high conviction that the debt is worth substantially more than what it is trading for.  Over the past eight months, we purchased debt in a good business at prices between 15 and 30 cents on the dollar.  Subsequently the company announced, voted on, and passed a restructuring of its balance sheet.  As we got closer to the restructuring being completed, we were able to short sell the millions of new common shares we were going to receive as bondholders at prices 250-400% above our effective cost.

In a month where the markets were up 5-10%, the distressed debt strategy delivered a return of 2.5% for the fund by being short common shares.  In other words, >100% of our return from this strategy was alpha.  We also generated positive alpha in the merger arbitrage portfolio by holding a gold company’s shares that was the subject of a bidding war and received two increased offers.  This bidding war is continuing as we write today.  The other strategies performed as we expected with small gains and losses generating additional net returns of 0.65%.  Pure alpha feels like finishing a 100-mile bike ride, scoring a hat trick in game 7 or hitting a game winning buzzer beater.  Alpha strategies continue to reward the fund. 

In accordance with our transparency policy, we report that Jeff has started to build his Nassau dream home and will be redeeming some funds over the coming year.  For the month of August, he redeemed $150,000 US.  Fair to add he is disappointed that he will be redeeming at a time where the previous year’s hard work and due diligence finally look like they will flow through to unit holders.  The funds were from a $2+ million-dollar contribution he made using the sale proceeds of his previous house two years ago. At this time we remain closed to new investment.

We thank you for your continued confidence and capital.

Caravel Capital.