Chenavari Investment Managers, one of the top rated fund managers for the past four years, continues its roll in April as all of the firms’s four funds were positive and are strong year to date.
After being named Risk Magazine’s hedge fund of the year, Chenavari continues to soar above the stock market and many hedge fund peers. The Toro fund, that eye-popping returns generator with relatively low downside volatility, is up 13.34 percent year to date and 3.98 percent in April. The Toro fund has exceeded its target of a 20 percent annual return in every year since its founding, with its most spectacular high coming in 2010 when the fund delivered a nice holiday present of a 90.56 percent annual return. Looking at these return streams can be impressive, but keep in mind the hedge fund has not been tested in all market environments, namely a 2008 style implosion. The credit strategy below invests in credit default swaps.
In the Toro fund’s market commentary, the content dug deep into the core of bullish logic in the Eurozone: the bullish outlook for the periphery credit markets, a hedge fund investing theme ValueWalk highlighted yesterday
“Supportive observations continued to provide a strong backdrop for assets with yield and duration especially periphery assets such as Spanish, Italian and Portuguese 10yr government bonds which tightened,” the letter observed.
Is periphery markets trade nearing the mainstream exuberance phase?
While the trade in periphery markets may be popular among in the know hedge fund investors such as John Paulson, Prem Watsa, Seth Klarman and David Einhorn, this trade run may be coming to an end, as potentially highlighted by Chenavari’s actions. The fund was net sellers of Spanish and UK non-conforming mortgages, known as sub prime assets. Is Chenavari getting cautious on the market? The fund increased the cash position to 18% and established a volatility play, buying volatility when implied Vol was low which “added tail risk” protection. Adding tail risk protection by buying volatility can be a tricky process, as the front month typically experiences a time decay relative to the back month. Some volatility fund managers utilize a time spread trading strategy that moves into a long volatility position while also benefiting from the near month time decay variables. It is unknown if Chenavari engages in this strategy.
Real Estate, credit funds up, some more impressive than others
While the Toro fund is the life of the party, other Chenavari funds play the role of the steady, logical friend who keeps a lid on the party and tampers any excessive volatility to both the upside and downside. The Chenavari real estate fund was one such example, up 0.39 percent in April and nearly matching the performance of S&P 500 (INDEXSP:.INX) year to date with a 2.02 percent move higher. The fund enjoyed a positive environment in the EU real estate market but is watching for signs of “stabilization,” meaning prices may have hit a temporary ceiling.
Corporate credit strategy performance
The long / short corporate credit strategy is another interesting offering from Chenavari if slightly more aggressive. Trading in credit-default swaps, the fund, up 1.02 percent in April and 4.32 percent on the year, primarily considers relative value of one corporate credit asset relative to another. The corporate analysis of credit worthiness could be fed to other strategy areas. Such a strategy, that utilizes convexity, benefits from a degree of price volatility that creates value disparities among assets. The fund also trades bidirectionally, which can also be influenced by the market environment of volatility. The step-sister to the corporate credit strategy is the less impressive regulatory capital strategy, which was up 1.12 percent in April and 4.58 percent on the year. In similar fashion, the multi strategy credit fund was up 1.25 percent in April and is up 5.14 percent year to date.