Refreshing the opportunities in relative value/convertible arbitrage investing: Q&A with Oliver Dobbs, founder and CIO of Credere Capital
The impact of the ongoing coronavirus crisis – which has seen an unprecedented market sell-off give way to a dizzying equity rally, with heightened volatility still tentatively looming over all manner of companies and sectors – is providing a rich assortment of relative value trading opportunities for Oliver Dobbs (pictured), founder and chief investment officer of London-based Credere Capital.
Before launching his relative value/convertible bond arbitrage fund in partnership with Trium Capital in 2017, Dobbs managed similar strategies for well-known hedge fund firms including CQS, Sir Michael Hintze’s multi-strategy credit-focused outfit, BlueCrest Capital Management, the long-running New York-based manager founded by Michael Platt and William Reeves, and Tribeca Global Management.
Managing around USD65 million in assets, the Trium Credere Fund is a global convertible arbitrage strategy. The investment team identifies and exploits arbitrage opportunities within the capital structure. These mispricings arise from soft catalysts and technical features embedded in convertibles and other hybrid securities. The strategy seeks to hedge out unwanted exposures such as equity, credit and interest rate risk, to isolate and capture the residual alpha.
This investment process has been developed by the CIO using 30 years of hybrid market experience and technical expertise.
In a year of decidedly patchy performances for hedge funds, Dobbs’ low-volatility, arbitrage-centred trading style has seen his strategy advance some 6 per cent in the first seven months of 2020, with volatility around 3 per cent and a Sharpe ratio of just under 2.
The veteran manager spoke to Hedgeweek recently about the surging opportunities in hybrid securities and relative value investing, the benefits of running a low volatility strategy, and why the convertible bond market is offering a “refreshing of opportunities” for his fund.
As a relative value trader, what is your perspective on what happened during the early part of this year?
“The virus is obviously a tremendously negative thing for people and for the world. I have an undergraduate degree in biology – specifically zoology – and so I did have a feeling that as we were getting more data about this virus, I felt that it was going to be a bigger thing than people were making out.
I’ve been through a lot of these risk-off situations, and I know that even intrinsically good risk assets go down in value. So I reduced the leverage in the book because going through this there were going to be mark-to-market losses that were real. That proved pretty good for our performance – we were down just 2.7 percent in March, but that still put us towards the top end of performance in my convertible bond arbitrage/relative value area.
Some people didn’t do that – because they couldn’t – since there was a reduction in liquidity, as there always is during these periods. So the bigger funds were stuck with what they had. I’ve been at bigger funds, so I know how painful that is.”
Can you talk about the opportunities in your markets right now?
“After March, it was then a case of: what next? I’ve been surprised by the V-shaped equity rally. The NASDAQ is up 20 per cent for the year, the S&P is slightly positive. So things have rebounded, and they’ve rebounded without any really good news.
I’m a relative value manager so what’s exciting for me is that everyone is now so worried about predicting the beta of everything. And why not? They should be – it’s a once-in-a-hundred-years disease-based crash. But because they are so busy either trading the flows or trading new deals, there is some straightforward arbitrage trades to be had, which is good for me.
Another thing that is happening is that Europe’s capital markets have decided to use convertible bonds as their number one source of corporate restructuring. Would you believe it? We had the biggest amount of issuance ever for May issuing securities with higher coupons and lower premiums, and some very complicated structures – which equates to opportunities for me.
The slew of new issuance is great for my market because convertible bonds tend to have a five-year maturity. So we’ll be able to make money out of these products going forward as well. It’s not just a one-off thing – it’s more of a refreshing of opportunities.”
What has your fund’s performance been like this year?
“We’re up 6.1 per cent net for the year. At our low we were down just 1 per cent. In July we were up about 3 per cent, making money on the relative value side. We’ve been very stable for our investors.
We’re low volatility – some hedge fund investors think we’re too low vol. But that’s not what we are. We can show that if we go through a market crisis, we really don’t lose much money, and we also make money on the rebound. But because we’re low vol, we don’t blow up. You have some funds that make hay with that type of high vol profile, but you wonder why anyone would actually pay them a hedge fund payment structure.”
What’s driven that performance?
“For our market, the Fed and the ECB have dropped interest rates, so for us that makes it easier for them to service their debt and is a positive on the credit side. Secondly, companies have very different earnings experiences. You have Amazon and Apple, Microsoft and Google who are doing well but then you’re going to get earnings from retail companies which will be horrific.
For the relative value community and convertible arbitrage community, it’s positive for us. The fact that corporate America decided in that period of time that they were going to the convertible market with some very interesting structures which we could buy or sell using our expertise was very interesting.”
What’s your outlook for the rest of 2020?
“We’re now sitting here at the end of earnings season and everyone wants to know how the next four months will play out.
When you’re in our space, if the market goes up 10 per cent or down 10 per cent, we’re still going to be making money. The area where we will make a small loss is if the market goes back down 25 per cent again. But I think that is unlikely because we’ve seen that already. History tells me you don’t respond to the same news in the same way.
The chance that we have another real rollover again is remote. We’re getting some really bad earnings from banks now in August, but back in March and April, we weren’t hearing about high street banks about to fall over, because they weren’t in that type of levered state like they were in 2008.”
Where do you see challenges?
“I'm still completely shocked by some of the valuations and stock prices. I’m finding it hard that US markets are doing so well. I’ve been talking to some big US allocators and they’ve been saying that some of their end customers simply saw the March thing as a long-overdue valuation mean reversion.
I don’t know if I understand that argument – it was caused by a global pandemic, it was nothing to do with the financial markets. But they saw it as a way of actually getting into the market which is probably why we saw a relatively good stock market rebound.
As a non-directional guy, the difficult thing for me is that I can’t tell you whether the markets continue to accrete up between now and the end of the year, or whether we will get a bit of nervousness - as we often do in the fall. But if that happens, we’re going to make money, because you get that dichotomy between credit and equity – and that’s where RV guys like myself make money.”