The Arb Fund (USD) lost 0.59% in November bringing the YTD return to 16.10% and the rolling annual return to 17.14%.
Growing risk aversion characterised market behaviour in November. Global equity markets fell over 4%, the S&P by 4.5%. Bank stocks and bank reputations both weakened further. This was a month in which the level of market stress was high and its impact was widespread. Of the eleven managers in the portfolio, four made money, three broke even on the month and five recorded losses. In merger arb, hedges against worsening credit paid off, but the same conditions that drove credit markets to weaken, caused five or six substantial takeovers to be abandoned. These were predominantly deals initiated by financial buyers. Sainsbury’s, the UK supermarket, was the subject of a bid approach in the summer. In November, the buyer, the Sovereign Wealth Fund of Qatar, withdrew its bid and the stock fell 20%. One of our managers was impacted by this.
In fixed income arb there was plenty of volatility in evidence. Volatility pushes valuation relationships between connected securities out of line, generating opportunities. But these unusual price moves can sometimes range wider and persist for longer than the manager expects. Provided the connection between the securities is real, that doesn’t mean that he will lose money. But it can easily mean that month to month results can be uneven until established valuation relationships reassert themselves. One of our fixed income specialists found himself on the wrong end of this phenomenon in November.
Mortgage arb was modestly profitable in the month. Convertible Arb made the greatest positive contribution to the month’s performance. The Convertible market in the US is not yet fully reflecting the increase in the volatility evident in equities. Since convertible bond managers are long of volatility most of the time, this is a promising indicator for the future.