Chenavari’s hedge fund strategies continue to consistently perform near their recent averages, with the high-flying Toro Capital European Structured Finance Strategy up 2.02 percent in June and 18.24 percent year to date, placing it among the best performing hedge funds yet again (see chart below). The multi strategy credit fund is up 6.10 percent year to date, while the long short corporate credit strategy is up 4.47 percent, according to an investor letter reviewed by ValueWalk.
Chenavari’s Toro II fund started with a bang
For Loic Fery‘s Toro II fund, up just 0.27 percent in June, the month nonetheless “started with a bang” as the ECB finally followed up its rhetoric with a proposal that went beyond even the high market expectations. “Despite the lack of clarity over exactly what assets will be purchased as part of any program, the news caused a sudden tightening in spreads in European ABS and a compression in peripheral risk premium,” the investor letter said.
The letter noted with inflation levels remaining depressed, and bund yields nearing the “fear levels” last reached during the sovereign crisis, the parallels with Japan become more worrying and the ECB will hope to see a quick response to its additional stimulus. “Compared to Europe’s continuing problems, the UK’s strong recovery appears to shine even brighter,” Chenavari’s letter said.
Chenavari on the real economy
The drop in unemployment is translating into the real economy, Chenavari’s letter noted, and can be seen from strengthening retail sales. But there are signs of a slowdown. New rules on mortgage underwriting appear to be taking some steam out of the housing market, allowing rates to stay low for the near future. This is occurring while household deleveraging is still ongoing. All this leads to the anticipation the Bank of England will hike before the Fed can be seen in the appreciation of GBP USD.
“But with US data beginning to paint a consistently positive picture (five consecutive NFP beats for example), the Fed has more chance to surprise with early tightening,” the letter said.
The low volatility multi strategy credit fund and the long / short relative value corporate credit strategy were operating in a curve flattening environment, impacting monthly performance. Both the EU and US the yield curve flattened, the investor letter noted, “precisely during end of June as the market became volatile and widened from its tightest levels.” This generated small positive returns on each of the corporate sub strategies.
However, the performance on the Convexity strategy was penalized by the flattening of the curves but benefited from higher volatility. Separate analysis points to a relative value strategy finding opportunity in volatility because it can have the impact of creating price divergence between related products on the yield curve. Managers use this opportunity to buy one product and sell a related product when their price relationship widens.