For the month of July, the Caravel Capital Fund Ltd was up 1.26%.
This month saw flat to positive contributions from each of the fund’s constituent strategies. Unfortunately, as we have found opportunities to compliment the portfolio, we have also found ourselves unwinding, hedging, or disposing of investments that have reached our targets. We continue to stay liquid and hold large positions in cash and treasuries. If we could fully employ our leverage allowance by just increasing the size of each holding in the portfolio, our returns could double. But as the philosopher Basho wrote, “a flute with no holes is not a flute,” and, as Chevy Chase said, “a doughnut with no hole is a Danish.” In other words, if we could, we would, but we can’t, so we don’t. We will not jeopardize our large liquidity position in the fund in order to chase returns at any cost. There is a time and place for that we don’t believe it’s now.
In light of the market remaining in our view irrationally exuberant, we felt it may be useful to walk you through what the fund is doing. Its holdings are summarized below.
|Alpha||0.21%||Long exposure to companies with excellent growth and strong balance sheets, are cash generators, and have positive catalysts in their futures. At the time of purchase, most of these characteristics are not fully reflected in the stock price. We often incorporate options where possible to protect gains prior to disposition.|
|Beta||0.04%||When warranted, we allocate capital to long or short positions on the market at large. We often employ options coincidentally to reduce risk in case we are wrong. Currently we are holding a series of US market put options against shares and call options of deep value companies we are long.|
|0.16%||This strategy holds convertible bonds that either offer substantial yields with limited sensitivity to interest rates, or offer a more conservative means to exposure in fundamentally undervalued stocks. It also consists of debt in companies who are likely to restructure their balance sheet. Often creditors will receive far more than what their debt trades for prior to a restructuring. This process can take some time (e.g. six months to a year), but often yields significant returns on capital.|
|Merger Arbitrage||0.19%||We have been quite cautious with this strategy given the elevated deal risk as companies and sectors suffer from the shakeout of COVID and the sharp GDP decline. That said, we like to short deals too! We have profited substantially more in the past four months from being on the short side of merger arbitrage than from being long. When the smoke clears and yields are compelling again, we will look to add long strategic merger positions.will look to add long strategic merger positions|
|0.35%||This strategy holds fundamentally sound investments that benefit from countries who must now maintain negative real interest rates. Explained simply: $200,000 of debt (e.g. mortgage) in 1979 was a heavy debt load. If the lender had only charged you $30-$40 per month in interest (equal to today’s two year rate) and you paid just the interest for 40 years, what used to be a heavy debt load would be quite reasonable today. That is what negative real rates will do - they will make debt relatively smaller over a long period of net positive inflation. This is what G7 countries are facing over the next 40 years. So, we are investing in assets that own and produce tangible things that store value over time. Currently, these include precious metal commodities and shares of companies who produce precious metals at low costs. That is a story for another letter.|
|Pair/Stub Trades||0.11%||We buy companies and short their subsidiaries when the parent is trading at a substantial discount to its holdings. We actively trade these positions and, although it can be a little boring at times, boring long-run profits are just as good.|
|Private Securities||0.07%||While the fund has a strong bias for liquid securities, it will sometimes participate in financings that are not immediately listed on public exchanges. The investor is compensated for the lack of immediate liquidity in these instances, and these considerations are often a source of excess returns in the medium-to-long term|
|S.P.A.C.’s||0.05%||S.P.A.C. is short for Special Purpose Acquisition Company. Sometimes referred to as blank check companies, these vehicles typically issue units for USD $10.00. The unit is made up of one common share and usually ½ or ¼ of a warrant (which is similar to a call option) to purchase common shares for up to five years after inception. The proceeds are held in escrow for up to 2 years while the issuer goes out to hunt for a private company to buy. Here is what makes SPACs attractive: if the issuer finds a deal that the market likes, the units will trade up substantially. We can sell into the increase in these instances, or alternatively request the issuer to redeem our shares for our original capital plus the interest they have earned while they have held the capital in US treasuries. Effectively, we are paid a small amount to hold an option that the SPAC managers can source an attractive transaction. The challenge is to find managers who are truly talented, and for them to find companies at a fair price that can grow substantially once public.|
|Special Situations||0.08%||The fund executes trades that do not fit neatly within any of the above baskets. These are typically one-off positions that are attractive on time and risk-adjusted bases.|
In a boring month where no one strategy stood out enough to warrant individual attention, we hope you found it worthwhile to see that sometimes, boring can be good.
We thank you for your continued confidence and capital.
|Month Return||YTD Return||Volatility||Sharpe||Sortino||Beta||Best Month||Worst Month||Annualized|