Covalis targets $500m fund to profit from market turmoil
Sharp swings in stock prices are throwing up opportunities, says hedge fund founder
London-based investment firm Covalis Capital is planning to raise $500m for a new portfolio to take advantage of sharp stock market moves, the latest fund to spot opportunities in the coronavirus-driven turmoil.
Covalis, an equity-focused company that manages roughly $1.5bn in assets, believes large-scale selling by investors cutting exposures in recent weeks, as well as the impact of government lockdowns on companies’ earnings, is throwing up trades for managers who can act quickly.
“We see a lot of dislocations right now,” said founder Zach Mecelis, a former trader at hedge fund GLG Partners, whose company specialises in trading utilities, commodities and infrastructure stocks. “We’re our most excited on a five-year view.”
The fundraising follows similar moves by a number of larger managers that have been closed to new investors for long periods. DE Shaw is raising $2bn for its first fundraising in its flagship fund in seven years and Baupost has been approaching investors, while Christopher Hohn’s TCI has been looking at further fundraising after being approached by investors.
Covalis’s two hedge funds have been shut to new money for several years. However, it has occasionally done co-investments, in which a client invests alongside a hedge fund in a specific trade.
But such arrangements can take time to put together. And because of the sharp daily swings in stocks over recent weeks, some disparities in share prices have opened up only for a matter of days.
For the new vehicle, investors will reserve a portion of the $500m capacity and, if an investment that Covalis spots meets their criteria, then it can put the money into the market rapidly.
Mr Mecelis said he had noted peculiarly large falls in some stocks hit by investors slashing risk, even though other stocks in the same industry and with similar characteristics were less affected.
He also pointed to sectors such as airports and toll roads, where the impact of the coronavirus lockdown around the world is badly denting companies’ earnings. Such large changes in profits, which have been lacking in recent years, can create opportunities for traders to bet on one stock against another.
“We've lived in a world where dispersion is very low, which is depressing,” he said, referring to the spread of profits of individual companies. “We now see enormous dispersion and volatility of earnings.”
Covalis’s main fund has made an average annual return of around 14 per cent, including double-digit gains in 2015, 2016 and 2017.
Meanwhile, US-based hedge fund Pecora Capital has raised $30m for a new Recovery Opportunity fund, to take advantage of short-term price falls in stocks and other assets.