Mohican Financial Management, based in Cooperstown, New York and Wilton, Connecticut, was established in October 2002 by brothers Eric and Dan Hage, who between them have more than 35 years’ experience trading convertible securities.
The rest of Mohican’s management team comprises credit analyst Marc Abizaid, chief financial officer Judd Vollbrecht, compliance officer Charles Hage, marketing manager Sean Nelen and operations manager Rebecca Gardner.
The Mohican VCA Master Fund, which was selected to join the Lyxor Managed Account Platform in 2007 as the Lyxor/Mohican Convertible Arbitrage Fund, focuses on convertible securities of small- and mid-cap US companies. In many ways the firm is closely aligned with the niche market in which it trades, priding itself on being small, focused and specialised.
Says Nelen: “Our size, experience and focus really help us in the less followed small- and mid-cap universe. 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.”
There are many benefits to focusing the fund’s investment strategy on small- and mid-cap companies, which have originated some 81 per cent of all new issuance in the convertibles space since the beginning of 2005.
Not only does this mean that the supply and range of buying opportunities are far greater than in the large-cap space, but 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 excessive leverage. The Mohican fund typically only uses about 1.7x leverage.
The aim 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, which is 95 per cent allocated to small- and mid-cap convertibles, are held for years rather than weeks or months.
On selecting positions, Eric Hage (pictured) says: “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 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, according to 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 regard to all macro exposures such as vega, rho and credit spread risks.”
Hage says the fund outperformed its peers last year because of Mohican’s security selection process and its ability to control risk: “We avoided any major losses and made significant positive returns on some underfollowed, smaller cap companies that few others in the space take the time to research the way we do.”
On winning the Hedgeweek award, Hage says: “It is gratifying to receive outside recognition for our efforts, but this business is about delivering positive results for our clients. We thank them for trusting us with managing their money – a responsibility we take very seriously.”