2020 September CAD

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1.10% MTD

8.66% YTD

Uphill Both Ways

Dear Partners,

For the month of September the Caravel Capital Fund Ltd was up 1.10%.

The Fund continued to generate positive returns from its diverse investment strategies.  The biggest contributor to profit in September was the closing of a distressed debt restructuring.  We were able to cover our short position in the stock by exchanging our convertible debentures for common shares at a massive discount. In other words, we sold high and bought (covered) low. The Fund also generated positive returns from being short call options on Tiffany’s  which has been  the subject of a problematic takeover by Louis Vuitton Moet Hennessy. The buyer  formally announced its intent not to complete the deal and the two are heading into a Delaware courtroom to determine the outcome. We have reduced our position by half.  We generated positive returns in our merger arbitrage portfolio and in our defensive Special Purpose Acquisition Company holdings. The Fund paid substantial fees this month related to the cost of borrowing shares it held short, most were related to the distressed debt restructuring. The Fund also lost money on long term call options on oil and precious metals.  

We would like to address a question we are hearing often: “What happens after November 3^rd.?” First,  we want to assure you the Caravel Capital Fund Ltd returns are not reliant on correctly predicting  political outcomes.  We prefer to capture opportunities created by speculators when there is no clear answer and things are simply mispriced versus hard facts.  We have held hedges all year that protect the downside of the fund from a potential market reckoning. Some hedges increase in value when stock indexes decline and some increase when the volatility of stock prices rise.  Both hedges have eaten away at our profits since the end of March, which would be frustrating if it were not for the peace of mind they provide to us and our investors.

Realistic scenarios after November 3^rd

(This and $0.50 won’t buy you a cup of coffee… but for what it's worth)

1. A close race on election night 52-48 for either party.  You end up with no government, no stimulus and protracted court battles adjudicated by a controversial Judiciary.  The market revalues future earnings down and stocks drop materially, think -20/30% sorry folks.  The S&P is trading at 25 times current year’s and 20.5 times next year’s earnings. This market is officially at dot-com level valuations and we know how that ended.
2. Republicans lose the senate, white house, and congress in a blow out. There are no checks or balances, corporate taxes go up and any economic stimulus is simplistic and ineffective.  Possible war on mega cap tech, which represents 30% of the market’s current value.  Real economic growth sputters to 1%. Stocks get punched by at least 10%. BUY GOLD!
3. Trump gets re-elected after leading by 5+% on election night and confirmed after 15 days of confusion,. The Senate is 50/50 and the house is Democrat.  Market may be range-bound, but is still skewed to the downside.
4. Democrats win the house but lose the senate narrowly, and win the white house.  The market should go up next year in this case, after that anyone knows. Hopefully the Democrats have learned not to tax companies too much.

On a procedural note, Jeff redeemed $1mm of his units as previously mentioned to continue building his house, while Glen increased his investment by $300k. Additionally, 100% of performance fees have been reinvested.

We thank you for your continued confidence and capital.

Caravel Capital