Evaluating the Chenavari Toro Capital 1 fund based on nothing but analysis of their returns, as is often done in algorithmic trading, a returns correlation can be drawn with the relative value category or the short volatility returns profile category. Based only on speculation of the returns profile and limited due diligence, the returns would might lead investors to believe the strategy is selling interest rate SWAPs. But the puzzle appears to miss a piece when one considers that fund says it uses no leverage in targeting an average annual return of 20 percent – a goal it has exceeded in every year of operation.

chenavari Toro returns

Chenavari’s Toro Capital Fund May performance

The hedge fund continued its consistent behavior in May, with the Chenavari Toro Capital fund delivering investors a 2.26% return while up 15.9 percent on the year through May, according to an investor’s letter reviewed by ValueWalk. That return makes Chenavari Toro among the top ten best performing hedge funds in 2014, according to data from HSBC’s hedge Weekly. The hedge fund was a top performer in prior years, with returns of 32% in 2012, 24.71% in 2011, and a 90.56% return in 2010. May’s strong results was “mainly driven by trading and mark-to-market gains,” the letter said.  In the US regulated derivatives industry mark-to-market gains are the mandated method to communicate performance.

Since opening in June of 2009 – a year it posted 80.12 percent returns – the fund has had only two negative months. Both of these months the losses were slight. While the fund might have experienced volatility, it was upside deviation – known as positive volatility – that was impacting the disputed Sharpe Ratio that showed a riskier investment when volatility is factored equally to the upside as it is to the downside.

chenavari Toro sector breakdown

ECB easing credit measures

“The upsurge of anti-European parties at the European Parliamentary elections could not derail growing expectations of potential ECB easing credit measures to kick start the economic recovery following disappointing European data in May,” the letter observed, as it outlined its trading strategy, indicating several relative value considerations. “We will continue to reduce our peripheral exposure and take advantage of exceptionally strong demand/supply dynamics triggered by the ECB pledge. Although not yet irrational, we feel current valuations on some sectors are no longer driven by fundamental value and therefore warrant a certain degree of caution. We will rebalance towards less crowded sectors where credit differentiation prevails and will continue to focus on off-the-run sectors, credit intensive sectors and/or structure.”

The Chenavari Toro Capital fund’s more moderate performing corporate credit strategy, a relative value play using credit-default SWAPs, was down -0.06 percent in may and is up 4.26 percent year to date.  Other strategies in the fund group were up. The multi-strategy credit program was up 0.23 percent in May along with the European real estate strategy, up 0.75 percent on the month. The regulatory capital strategy, Toro II, was up 0.64 percent.