Tyrus Capital Opportunities Fund

Best Performing Event Driven Fund

Originally published in the April/May 2013 issue

If the 7.6% return achieved by Tyrus Capital Opportunities Fund in 2012 was far from the manager’s highest historical performances, it must be seen in the context of Tony Chedraoui’s particularly cautious risk-taking stance last year. In 2012 Tyrus was concerned about clear tail risks in Europe. While in 2008 Chedraoui famously made 15% for the Deephaven European Event Fund he ran – and he does sometimes short events including mergers – last year’s shorts were more about preserving capital than acting as profit centres.

Tyrus Capital seldom employs much leverage in any market climate, but last year’s average invested percentage of 60% was still unusually low. Although investors had by the fourth quarter stopped pricing in tail risk, Chedraoui remained circumspect in his outlook. Consequently the fund’s volatility stayed subdued throughout the year.

Other facets of risk were also tightly controlled as they always are in accordance with the manager’s risk philosophy. Tyrus Capital is always very selective when it comes to merger arbitrage, and last year the manager had minimal exposure to deals facing anti-trust risks. The fund stuck to shorter-term event trades with more predictable outcomes, and also did more proprietary trades. Developed markets are always preferred for their well defined legal systems, although some larger emerging markets such as Brazil or Mexico can be considered. In all geographies the fund trades liquid mid and large capequities. Downside risks are protected with option structures including put options. Risk is also reduced by the simple fact that Chedraoui tends to view each corporate event as a unique risk, which will not be correlated to the other corporate events in the book – or to financial markets in general. Whereas pure merger arbitrage strategies can be vulnerable to correlated deal break risks, Chedraoui constructs portfolios spanning a broader spectrum of event types – including restructurings, rights issues, spin-offs, dutch tenders, and buy-backs – that show much lower correlation to one another, or to merger deal break risk.

The investment team of 12 all have hands-on event experience going through the process of doing corporate deals. As opposed to buy-side people, all of them were once investment bankers or lawyers who have spent years poring over every milestone along the timeline of corporate events. Chedraoui himself was a star M&A banker on Lehman Brothers’ TMT team. The Tyrus Capital team, therefore, has a thorough understanding of legal and regulatory processes. It also has the financial modelling skills to estimate how “pro forma” profits of companies will change after tie-ups or spin-offs, and at what cost predators can obtain financing.

2013 has started with most investors taking a much more constructive view of risk assets, and very little tail risk priced in. The giant Dell and Heinz deals are signs that capital is flowing freely once again. This means that there are some “compelling hard catalyst trades out there, including corporate restructurings and spin-offs that could be transformational,” says Chedraoui.

Yet he remains wary that the European crisis could resurface, citing recent jitters in Portugal that sent bank stocks down 10%. Italy, Spain and Cyprus could also be sources of negative news-flow, he fears. Europe is “very dry” for deal flow, Tyrus Capital observes, and they are worried that austerity measures could continue to curtail economic growth. The long hoped-for European merger bonanza has still not materialised. Consequently the value book is mainly focused on North America, which has plenty of deep value and event catalyst opportunities, while the substantial allocation to proprietary trades offers an upside optionality based on a European recovery.

Tyrus has been hard closed in the past but currently has some capacity in both of its Cayman funds. The Tyrus Capital Opportunity Fund has a larger allocation to value trades and less merger arbitrage than the Tyrus Capital Event Fund, but there is considerable position overlap between the two.