Mohican Financial Management LLC, based in Cooperstown, New York and Wilton, Connecticut, was established by two brothers, Eric and Dan Hage in October 2002. Between them, the brothers have over 35 years of experience trading convertible securities.
The Mohican VCA Master Fund focuses on convertible securities of US small- and mid-cap companies. In many ways, the firm is closely aligned with the niche market in which it trades and prides itself on being nimble, focused and specialised.
There are many benefits to focusing the fund’s investment strategy on small- and mid-cap companies. Since 1 January 2005, these companies have issued approximately 80 per cent of all new issuances in the convertibles space. This means that the supply and variety of buying opportunities are far greater than in the large-cap space.
Moreover, the fact that these securities are often inefficiently priced and offer higher yields means that there’s significant arbitrage potential and, from a risk management perspective, less dependence on using leverage: the Mohican fund typically only uses about 1.7x leverage.
Sean Nelen, Marketing Manager, tells Hedgeweek: “Our focused research process enables us to get to know these companies in-depth and our versatile approach to arbitrage allows us to profit from different types of arbitrage opportunities.”
The aim of the portfolio is to generate returns to investors that exceed the implied median credit spread of the small- and mid-cap US convertible coupon bond market and the interest rate of like-for-like maturity US treasuries. Most positions in the portfolio are held for years as opposed to weeks or months.
On selecting positions, Eric Hage (pictured) explains: “We use bottom-up research with a primary focus on the credit quality of a company. If we feel comfortable with the balance sheet, business plan and management team we’ll then look at the convertible security and gauge where it is being priced in the market versus our judgment of where it should be priced.
“If the convertible trades at an implied credit spread that is significantly wider and/or a volatility that is low relative to our expected future volatility we’ll research the security further and add it to our portfolio if it meets our criteria.”
Risk in the fund, which is delta neutral, is controlled, says Hage, by maintaining a well-diversified portfolio across industry exposures with strict limits on individual position sizes per company. “The portfolio is also closely monitored from a top-down basis with regards to all macro exposures such as vega, rho and credit spread risks.”
As for market opportunities in 2012, Hage says that the recent volatility in the markets has created some “interesting individual buying opportunities in US convertibles”, especially in “off-the-radar” companies that Mohican has researched for years.
“Despite all of the negative macroeconomic news, first quarter earnings for our small and mid-cap US companies were generally solid and corporate balance sheets continue to look very healthy with plenty of excess cash.
“We see the current environment as one that is solid for the convertible arbitrage trade – going long/short duration debt of solid balance sheet small and mid-cap US companies at relatively wide spreads while simultaneously going long equity volatility at low implied volatilities in an ever-changing macroeconomic news cycle,” says Hage.
On winning the award, Hage comments: “We feel proud. It is gratifying to receive outside recognition for our efforts. We’d like to thank our clients for trusting us with managing their money. We take that responsibility very seriously.”
