Chenavari concerned about global tensions
While global tensions continue to concern fund managers such as Chenavari – but apparently not bother other stock market investors in a stimulus stupor – in Europe, talk of full blown QE persists and “the denouement of the Banco Espirito Santo SA (ELI:BES) story lead to state intervention,” a few bright spots exist.
In an investment letter reviewed by ValueWalk, Chenavari notes that Spanish GDP outperformed the consensus, and Eurozone unemployment continues to head lower. Spain in particular had been watched by European observers as the country climbs out of a debt crisis and government bond rates sink throughout the Eurozone to highly unusual levels. Despite a steep sell off in high yield bond markets, Chenavari’s credit strategies didn’t reflect the same performance dislocation percentage during July. The Multi-Strategy Credit program was down nearly 0.4 percent on the month, while remaining up 5.66 percent for the year; the Long / Short Corporate Credit program was down -1.08 percent in July and were up 3.34 percent on the year with a higher volatility profile.
Chenavari’s Toro II up 0.24% in July
In July Chenavari’s Regulatory Capital strategy (Toro II) was up 0.24 percent and is higher by 5.78 percent on the year. The fund said performance was driven by an accounting factor, “carry on the book,” which offset a negative mark-to-market adjustment on a Portuguese exposure. The strategy invests in a variety of credit instruments such as asset-backed securities, collateralized loan obligations and credit-linked notes – all of which are private deals and generally not accessible on a public market.
Toro IA is up even more with a 19.21 percent return, making it among one of the top performing hedge funds this year, once again (see charts below).
The investment pipeline for this strategy includes a portfolio of Dutch consumer credit, Italian consumer loans and the fund is currently in the due diligence phase on a potential credit deal involving a UK residential mortgage portfolio. In considering the overall bond market, Chenavari observed the credit markets rallied on Yellen’s forward-looking comments on US monetary policy. Wider spreads in credit markets were driven by increased tensions in the Ukraine and Middle East as well as lighter summer liquidity. From a risk management standpoint, Chenavari noted they “continued to realize some convexity through the bigger market movements seen this month.” Convexity is a risk management concept commonly used by volatility traders which aims at making profits from market moves. A convex risk profile will return positive results on both ups (spread tightening for credit) or down (spread widening) of the credit markets.