2021 August CAD

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1.51% MTD

18.22% YTD

When it looks easy.... It usually isn't

Dear Partners,

For the month of August, the Caravel Capital Fund Ltd was up 1.51%. 

We are pleased to report that the Caravel Capital Fund Ltd generated its returns across a spectrum of strategies in the month of August. The merger arbitrage, alpha long/short, and warrant arbitrage strategies were the most significant contributors to the month's performance. The Fund continued to hold 40% of its capital in cash due to the excessive systematic risk in the broad market. We have addressed this concern in past letters so rather than reiterate, we offer one of Jeff's market rules: "Markets always overshoot the rational case, regardless of direction," and one of Newton's laws: "for every action, there is an equal and opposite reaction".  

It's been a while since we provided a granular explanation of what we did in the month. It is most likely because, according to google analytics, this causes the amount of time our readers spend on our website to drop dramatically. To keep engagement high and our partners informed, we decided to highlight one example of each of the three strategies that worked well: merger arbitrage, alpha short, and warrant arbitrage. First, the Fund invested in a takeover in the mining space after the shares were trading at a considerable discount to the takeover offer. Likely the deal was too small to attract attention and capital from larger funds and too complex in nature, as it was a cross-border transaction with embedded election optionality. These factors created the opportunity to invest, resulting in a 25+% return over a period of 2-3 months for Caravel. Second, the Fund also enjoyed continued declines in one of its alpha short holdings in the airline sector. The company just reported another dismal quarter with a 98% drop in revenue and now has negative shareholders equity. The company finally acknowledged its concern about its upside-down balance sheet, which tells us it's time to raise hundreds of millions in equity at likely much lower prices. Already in September, the shares have fallen another 19%. The third strategy we highlight is in warrant arbitrage. The Fund invested in a new issue of common equity by a tech company. What attracted us to the financing was the inclusion of common share purchase warrants in the funding. We were able to hedge the warrants using the company's incredibly liquid listed options market at prices well above the value we paid. This position continues to generate attractive returns in September as well.

The Caravel CAD fund operates with the mission of producing consistent high returns while minimizing downside volatility. Caravel has a relatively small number of investors, each of whom we call Partners. If any Partner would like to discuss further what we are doing or how we are doing it, we welcome your call or email anytime. We enjoy talking about our strategies and our outlook and would welcome your perspectives.

On September 1^st Jeff redeemed USD 600,000 from his holdings to continue building his house. We thank you for your continued confidence and capital.

Glen & Jeff - Caravel Capital