2022 September CAD

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-8.49% MTD
-8.10% YTD

Down but not out

Dear Partners,

For the month of September, the Caravel Capital Fund returned -8.49%, bringing 2022’s year-to-date return to -8.10%. 

Very little went right for risk assets in September, with the S&P 500 (-9.22%) and Barclays Global Corporate Bond Index (-5.14%), to name two examples. The Fund was no exception, experiencing by far the worst monthly performance in its history. We suffered losses across our macro, convertible, and merger strategies, with the most significant loss coming from the termination of a PIPE transaction in which Caravel had an interest. Having hedged the underlying security, the termination represented a “worst-case scenario” for the Fund, where the underlying security (which we had shorted) appreciated, and the PIPE (which we owned) lost value. We have since exited the position. This outcome was obviously unforeseen, and we are still perplexed by the events as they unfolded and can say it’s a first for all our careers. Having said this, we take full responsibility for the loss and this month’s unacceptable performance. As a result, the Fund has closed its doors to new investment until we feel the performance warrants a re-opening. 

Rather than despair, however, we wanted to point to two areas of the portfolio about which we are optimistic going forward.

Firstly, the Fund continues to produce solid gains from its energy portfolio, which consists of stocks, equity options, and derivatives on underlying commodities, which we use to mitigate risk. Despite growing global recession concerns, oil and natural gas prices have remained incredibly resilient. Their performance is particularly impressive when measured against the backdrop of two macro developments. Firstly, the US government has materially depleted its strategic petroleum reserve (SPR) by selling barrels into the market daily. This off-loading has artificially (and only temporarily) boosted supply to suppress oil and related prices in anticipation of a tightly contested midterm election cycle. We believe we are in the late innings of this game (read: extra innings). Secondly, the Chinese Communist Party has remained steadfast in its commitment to and enforcement of a zero-COVID policy, which has crippled output from one of the world’s largest and fastest-growing economies. We do not know when, but we like the optionality presented by the prospect of a softening (or abandoning) of this policy. We believe both dynamics are part of the compelling argument that market participants, as evidenced by futures pricing, are too pessimistic about oil and gas. We, therefore, continue to own high-quality producers with top-tier assets and management teams. We expect this trade to outperform over a medium-term time horizon.

Secondly, we have continued to seek and increasingly find excellent risk-reward dynamics in the merger arbitrage book. Specifically, we have several short positions in cash bid mergers where we detect financing risk, anti-trust concerns, buyer’s remorse, dissenting shareholders, or any combination thereof. In a rising interest rate environment, with low visibility into future corporate performance or prospects, we expect these issues to persist and are likely to worsen. Factor in political regimes in both Canada and the US with heightened sensitivity to anti-trust concerns and consumer protection, and we may just have a perfect storm as we look toward 2023.

Finally, as always, we’d like to provide our perspective on the state of things in financial markets. After a snap back to reality in September, stock indexes have been volatile, if rangebound, so far in October. Earnings have been mixed, but the economic data clearly suggests that the path forward for interest rates, at least in the US and Canada, remains higher. However, we are returning to levels on specific stocks and sectors where we believe sufficiently negative future expectations are being factored into prices. Our conversations with economists and analysts suggest that inflation, especially in goods, may be peaking and that by the first half of next year, global central banks may have reached their respective “terminal” interest rate targets for this cycle. We still believe earnings estimates need to come down for 2023, and as such are hesitant to call a bottom here. But we see green shoots. We maintain high levels of cash and hedges to reflect current levels of uncertainty, not just in financial markets but in global affairs. As always, we will remain patient and deploy capital into opportunities proportionately to their prospective returns relative to their risk profiles. 

We want to thank our partners for placing their trust in us to manage their capital, and we apologize for September. Jeff reluctantly redeemed $600,000 US at the end of the month for what will hopefully be the last payment for the build of his house. As always, we welcome your call.


Caravel Capital.

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 500-9.22%-23.88%16.52%0.450.630.1312.82%-12.35%10.58%

Growth of $1000 since inception

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