For the month of January, the Caravel Capital Fund Ltd was up 3.40%.
The fund again saw meaningful returns across multiple strategies last month. The distressed debt portfolio generated outsized gains as debt that was purchased below thirty cents on the dollar increased to nearly fifty cents. At the time of writing, the value of that debt has risen again to closer to sixty cents. The realized return upon disposition will likely be close to 100% since November. Another major contributor came from our portfolio of Special Purpose Acquisition Companies, more commonly referred to in the media as SPACs. The froth in the market has made these types of investments particularly attractive for low risk and high return seeking funds like Caravel. Our portfolio of oil companies and our call options on oil continued to generate strong returns, as did our hedged investments in holding companies against their publicly traded subsidiaries. The latter has been producing respectable returns for months and we are very pleased with this contribution. Caravel’s merger arbitrage portfolio generated about 20% of the net return to the fund for January. Most of this strategy’s contribution came from conducting a deep dive into valuing the consideration a mining company was offering to the shareholders of another company it had agreed to purchase. It would be helpful to walk you through this kind of opportunity as they are often lucrative and seldom understood.
In October, the market was not prepared to properly value a spinout as part of a takeover offer, which happened to be a substantial ownership in a stand-alone mining operation. After several meetings with management, we determined the market was valuing the new spinout at approximately 1/5th of its fair value. For over two months, we slowly accumulated a large position in the target company. These spinouts often remain undervalued until the merger is closed, the spinout begins to trade under its own listing and management is able to market the new company. It is also typically at this point that investment banks are allowed to officially assume research coverage and write up reports that look a lot like what we determined in the weeks and months prior. The spinout we purchased increased in value upon listing in January, and continues to perform well in February generating a solid 200+% return for the fund. We have been reducing our holdings of this spinout as it has appreciated towards what we believe its fair value to be.
We hope you will be pleased to hear that the fund had no position in Gamestop shares before, during, or after the month of January.
We thank you for your continued confidence and capital,
Glen & Jeff - Caravel Capital
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