MAY 2017

CAPITAL INVESTMENT FUND

  • -0.28% (Class A)
  • -0.22% (Class F)

OPPORTUNITIES FUND

  • -0.28% (Class A)
  • -0.22% (Class F)

How do we find new trading strategies?

We have an internal research process that looks to develop new trading strategies.  It starts with an idea, then the idea moves to the creation of a model, then that model is ‘back tested’, (which uses historical market data to see how well the strategy would have worked if it was implemented at some point in the past).  

Once a model is proven, we typically put it in use with a small allocation of dollars.  If that test is passed, we decide on an increased allocation of resources and then monitor it’s profitability.  

Market conditions are constantly changing, so what worked last year may not be working this year, and a strategy that stopped working years ago, may work again.  We are constantly monitoring these conditions to make decisions on which strategies could generate positive returns and which strategies to put on the bench.  

Julian discusses a couple real world examples below, saying that the number of event driven opportunities has grown dramatically as of late, but the amount of arbitrage opportunities from structured products has contracted.  We adjust our strategy allocations to respond to these conditions, and the more proven strategies we have on our bench, the better we become at matching the strategies that generate positive returns in existing market conditions.  

As always, please be in touch if you have any questions about our funds.

Sincerely,

Jai Hawker

Capital Investment Fund

The Capital Investment Fund declined -0.2% for the month of May.  The Fund’s risk arbitrage strategy added 0.4% from proration upside in the closing of the Sirius XM Canada deal, along with an increased allocation to subscription receipt relative value arbitrage spreads. While the Volatility strategy was flat for May, it remains up 6.1% year-to-date. The structured product arbitrage and multifactor portfolios were down -0.1% and down -0.3% on the month, respectively. 

The structured product market quandary, with many securities uncharacteristically trading at premiums to net asset value, has presented challenges to the Fund as of late.  The Fund’s structured product arbitrage strategy relies on buying securities that are at a discount to NAV.  The low market volatility, combined with unsustainably high dividend payouts, has created an environment in which the Fund has difficulty finding a sufficient number of structured products that meet our hurdle rate.  Given this challenge, the Fund has recently begun allocating more of its capital to the risk arbitrage, multifactor and volatility strategies. 

Opportunities Fund

The Opportunities Fund declined -0.2% for the month of May.  The relative value portfolio added 0.4%, as a number of subscription receipt and tracking stock spreads tightened.  The merger portfolio gained 0.1%, after the acquirors of both Norsat and PrivateBancorp increased the merger considerations for these targets.  The high yield portfolio was flat for the month, while the special situations and liquidation strategies declined by -0.2% and -0.4% respectively.

The current environment is perhaps the busiest in the history of the Fund with a record number of outstanding corporate actions in Canada, along with a decent suite of opportunities in the US.  The Fund’s capital is fully deployed, not to mention holding back on adding to attractive spreads, with over 1/2 invested in relative value investments, 1/5 in each of merger and special situations, along with small allocations to liquidations and high yield.  Select underfollowed merger spreads in Canada present compelling risk-reward profiles.  We expect a handful of deals to close over the next month or two. Certain recently issued tracking stocks in the US are trading at attractive discounts.  In the current low-volatility environment, the high yield sector is anything but – on average junk bonds yields are far too low to allocate capital.  Globally, the best opportunity set is in North America, as we are finding very little compelling outside of Canada and the US.

Julian Klymochko, CFA 

Trout Taylor