2022 April CAD

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.10% MTD
3.25% YTD

Are We There Yet?

For the month of April, the Caravel Capital fund was up 0.10%, bringing the total net return for 2022 to 3.25%.

This is one of those rare times that we don’t have a lot to say. The concerns we have expressed over the past six months have come to bear (pun intended) on global equity valuations, as stocks and bonds have effectively entered bear markets. What investors want to know now is, "Are we there yet?"

We would like to begin with an excerpt from the March investor letter written by Howard Marks, CEO, and founder of Oaktree Capital. He said markets behave similarly to a ball hanging at the end of a string. When you raise the ball to one side and let it go, it swings past its equilibrium position in the opposite direction. How far the ball swings in the opposite direction depends on how high the ball is when it’s dropped. We believe the NASDAQ 100 was approximately 15-20% above its ‘equilibrium position,’ and the S&P 500 was about 10-12% above it. The equilibrium position is the point where elements of systematic risk: valuation, economic, and regulatory are understood, earnings forecasts are rational, and expected returns are in-line with the norm, also called fair value. Professional investors employ different methods to calculate a fair value for securities, which they rely on when making investment decisions. Differences in fair value are what create buyers and sellers. Since mid-2021, we have expressed concerns about elevated and rising systematic risk in markets and have tried to articulate those thoughts in past letters.

At the time of writing, equity and bond markets have dropped 20-30% from their highs. As of May 12th, we believe that holding large systematic hedges no longer presents an effective deployment of capital. Equity markets have swung 5-10% below OUR fair value calculation. As a result, we have substantially reduced our systematic hedges. Having decreased our aggregate exposure earlier this year, we are adding new positions to our merger arbitrage portfolio. Risk-adjusted returns have materially improved in this sector due to forced liquidations. If markets adjust to an elevated risk profile, we will once again add substantial systematic hedges.

If you would like to discuss anything, please call us. We love catching up with our partners.

We thank you for your continued confidence and capital,

Jeff and Glen.

Monthly Performance (net of all fees)

JanFebMarAprMayJunJulAugSepOctNovDec YTD

Risk vs. Return Comparisons Across Indexes

Month Return YTD Return Volatility Sharpe Sortino Beta Best Month Worst Month Annualized
S&P 500-8.72%-12.92%15.55%0.931.230.0912.82%-12.35%14.08%

Growth of $1000 since inception

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