At the core of our capital structure arbitrage strategies is the ability to maintain strategic flexibility, i.e., asset class agnostic. While we tend to favor securities with inherent convexity, e.g., convertible bonds, we often find more attractive trading opportunities in the underlying equities and seek to synthetically create convexity, e.g., through options. For our long-positions, our equity long/short strategy focuses on growth equities with improving balance sheets and favorable structural characteristics, e.g., Porter’s Five Forces. Perhaps most importantly, we focus on imbalances between investor expectations and our view of the company’s execution risk, which we often find manifested in valuation.
The Panthera Capital Difference
The ability to move across the capital structure enables Panthera Capital to holistically judge securities on their relative merits. This is in stark contrast to managers maintaining a bias towards strategies they offer, regardless of a possible lack of opportunities. In other words, managers with siloed strategies may adhere to rigid mandates and this strategic inflexibility can result in underperformance. Where these managers do offer a broad set of asset class investment options, the analysts recommending the securities often operate in separate teams (particularly in large firms) rather than in a cross-asset approach, which inhibits optimal timing of entry/exit points.
At Panthera, to bias results in our favor, we lead with convexity structures. By starting with such trade structures at the top of our screening process, we attempt to quantitatively bias results upward at the outset, prior to applying any fundamental or technical analysis. We find the most ready-made packaging of this convexity in balanced convertible bonds. Convertibles theoretically trade at no less than the maximum of the straight debt value and the conversion value. This exposure to equity upside combined with downside buffers allows balanced convertibles to offer convexity.
However, convexity can be generated even if it is not present in any given security. An up-the-curve/equity-sensitive convertible bond may not provide asymmetry while a busted convert (deep out-of-the money option) does not allow for upside participation. But in both cases, the equity may be attractive. Having the flexibility to selectively add equities and then create asymmetry through hedging and options strategies can enable a manager with above-average security selection skills to protect to the downside and outperform to the upside. It also dramatically expands the investment universe and sets up better return potential by not chasing ready-made, seemingly balanced/convex converts, which are often simply over-priced (“rich”).
Furthermore, Panthera Capital frequently deploys event-driven strategies, which minimizes market risk and leverages options to generate asymmetry. One strategy in particular has large alpha potential while also lending itself well to a market neutral positioning, thereby enabling high potential risk-adjusted returns on minimal market exposure. Plus, due to the nature of the event itself, the securities may feature lower company-specific risk.
Equity Long/Short Summary
- PC’s Strategy – Selecting securities featuring imbalances between execution risk & investor expectations, plus event-driven strategies, e.g., securities experiencing catalysts that have historically produced excess returns while partially hedging out beta/broader market exposure. Includes closed-end funds (for diversification & to capitalize on NAV discounts/premiums). 130-30 target long/short mix but flexible based on market conditions. Short percentage not expected to exceed market neutral levels for extended periods.
- Security Selection Focus – Our general focus for long-term holds are companies demonstrating strong business profiles, e.g., rated highly on Porter’s Five Forces basis, above-average growth and visibility combined with expanding cash flow margins and room for valuation expansion. Primarily focused on TMT and small/mid-cap companies.
- Suitability – Apt for investors seeking growth with downside protection relative to the broader equity market.
- Relevant Benchmarks – HFRX Equity Hedge Index, Russell 2000, MSCI World Information Technology Index, Nasdaq composite.