Profiting from market volatility
The portfolio managers at Raven Rock Capital utilize a strategy that thrives on price volatility, so recent market turbulence isn’t necessarily a bad thing.
The Chapel Hill, N.C.-based firm invests in a wide spectrum of credit qualities and across issuers’ entire capital structures, primarily highyield bonds, convertible bonds and leveraged loans.
The Raven Rock Income Fund, which is offered through Toronto-based Arrow Capital Management, and the Raven Rock Credit Fund for U.S. institutional clients, are run using two sub-strategies.
The first is a directional credit portfolio, in which the managers take individual long or short corporate bond positions.
“Credit is an attractive spot within fixed-income,” portfolio manager Guy Caplan said. “Credit has favourable fundamentals and lower interestrate risk than sovereigns and municipals.”
The high-yield sector tends to be shorter duration, which is one reason the managers are particularly optimistic about this market segment.
“The quality of corporate balance sheets indicates good risk/reward characteristics for the asset class,” co-manager Bobby Richardson said.
The other side of the portfolio utilizes a relative value strategy, trading one instrument in a company’s capital structure against another.
The biggest component of this strategy is currently in convertible arbitrage, in which a position’s equity market exposure is neutralized by hedging a portion of the shares into which the bonds are convertible.
“This is a way of getting long equity volatility,” Caplan said.
The managers, a group that also includes Nate Brown, say the real alpha generator is their ability to shift between directional credit and relative value credit. “you typically have equity volatility when credit spreads are moving wider,” Mr. Richardson said.
There hasn’t been much equity market volatility until recently, so the convertible arbitrage side of the portfolio hasn’t been a strong contributor. However, the managers have raised their exposure to this strategy to about 50% of the fund in the past month, up from roughly 40%.