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With a reported trade win percentage near 80%, the Duet Global Plus fund is operating on the high end of the range for hedge fund performance in this key statistic, but overall returns for the fund nonetheless fell short of expectations in 2013, with just a 3.95% annual return, its worst yearly performance in its history, according to an investor letter reviewed by ValueWalk. The fund’s annualized target is 10% to 15% with a low volatility target of 3% to 4%. The level of downside deviation at 0.47% is also significantly positive as is the worst drawdown of -0.87%, showing a focus on risk management.
Duet operates a discretionary market neutral strategy that focuses on catalyst opportunities and trades primarily in Europe. Looking back on 2013, the fund notes a key trade that represents a significant benchmark for the fund.
Key benchmark in Duet fund progress
“ThyssenKrupp AG (ETR:TKA) (FRA:TKA) raised €882m through a primary offering on the 3rd of the month,” the investor letter says. “This was one of the most flagged trades in history and the entire capital markets industry was focused on the outcome of this trade. Multiple banks had planned to bid tightly to secure this extremely high profile and valuable capital raise and push them higher in the final league placings. However, the weekend prior to the trade the company had announced new strategic plans which some saw as scuppering the potential fundamental interest that was awaiting this transaction. This caused multiple banks to step back on price but JPMorgan Chase & Co. (NYSE:JPM) believed that despite the uncertainty, they would bid to win and they secured the capital raise.”
Securing appropriate leverage in deal flow is a matter of importance the strategy considers. “The banks who had stepped back were hoping that their decision had been proved correct and that the strategic change in outlook of the firm had diminished the market demand and the trade would struggle,” noting the intricate balance in the demand structure. “It was then that all the experience, edge and influence of the fund came into play as we calculated that the presence of an order from us would significantly change the outcome of the trade. The strategic outlook news had already been priced into the market with the stock adjusting in the session prior to trade announcement. Our analysis showed that an increase in coverage due to our order would diminish other investors uncertainty, causing further orders which would also entice the largest shareholder, Cevian, to participate and therefore produce a successful transaction.”
Display of influence on capital markets
The trade Duet is describing is significant due to the impression it left and the meaning this could have relative to future trading counterparties. “The trade itself, which without our participation faced problems and potentially negative returns, then worked well and brought a +10bps return to the fund. The true value of this trade to the fund was even more significant as every bank saw how truly vast our influence on the entire capital markets landscape was and how we were, without doubt, the critical key demanded relationship for all banks. Other banks who brought transactions without our support were not so lucky, magnifying the point above, as UBS AG (NYSE:UBS) and Nomura struggled with an $800mln secondary in Bpost which they were unable to cover. A Goldman Sachs Group Inc (NYSE:GS) overnight secondary transaction in Peugeot SA (EPA:UG) (OTCMKTS:PEUGY) also faced poor market performance but our combination of trade selection and top class risk management insulated any potential significant downside.”
The investor letter noted with optimism the improved outlook for its market neutral strategy. “2014 is looking like the most exciting year ever for the Fund in terms of opportunity set, edge and potential for strong risk adjusted returns with no downside volatility and no correlation. The previous year has produced 4% for our investors alongside total protection of downside risk and minimal correlation and despite a tricky block environment.”