RHO INVESTMENTS MULTISTRATEGY – SIL

January 2023 – Is worth highlighting once again that the fund generated such strong returns from a cautious stance on capital deployment and a moderate use of risk capacity (more granularity on this topic at the end of this commentary section). From a performance attribution point of view five out of the six underlying strategies generated positive returns. The Relative Value bucket (-0.1%) saw performance dragged by the incorporation of a relatively large new investment predicated on the divergent pricing of implicit cost of risk for banks in equity vs credit markets, and which takes the form of long SX7E June 2023 call options (0.8% of NAV art risk in premia paid) vs long protection on the iTraxx 5-year sub fins CDS index (notional equivalent to 17% of fund´s gross market exposure). Although performance for this new addition to the bucket amounted to a -0.2% contribution in January, so far in February has been a major driver of profitability, with this relative value positioning contributing close to +1% of net portfolio performance. Micro Strategies (+3.9%) performance was driven by a strong rally in European airlines, which prompted the fund to take profits in its entire holdings of Ryanair shares (amounting to 2% of NAV) and Wizzair shares (1% of NAV) which generated net returns over total NAV of +0.5% and +0.4% respectively. Within the bucket we continue to see strong performance in Spanish renewable energy stocks, which still exhibit very attractive valuation metrics and positive event risk optionality as we expect incumbent utilities to make acquisitions amid the independent smaller specialist renewable players to increase their green footprint. Soltec Power Holdings stock, which remains our highest conviction play within the space, generated +0.4% overall performance for the portfolio as the stock rose +32.5% in the month. Macro strategies (+0.6%) saw performance driven by 4200-strike May 23 calls on the Eurostoxx 50, that we decided to exit as the position maximized convexity to avoid unnecessary time decay on the exposure, particularly given our cautious view on equity market valuations. Special situations (+0.3%) saw gains driven by positive mark to market in our holdings of shares of Spanish retailer DIA and our exposure to distressed senior unsecured bonds of French care homes operator Orpea, as the company advances in its restructuring plan with creditors. Active (short-term tactical trading) strategies generated a +0.1% contribution to overall performance driven by activity in very active credit primary markets, where new supply on average carried significant new issue concessions. Finally, liquid investments within the very long-term and thematic bucket Deep Value strategies (+0.6%) remain focused on the beleaguered US tele-health sector. Beyond long-term drivers (demographics, budget deficits associated with rising health care costs, deeper penetration of telehealth post covid 19, etc) we believe that themes of positive event risk and pressure from activist investors might emerge in our holdings of Amwell and Teladoc thus providing a good floor to stock prices. Our decision to add risk last December in both stocks was validated by price action in January (with Amwell gaining 38% and Teladoc 18%) which (coupled with very high levels of implied vol) makes resuming covered call overwriting on our exposures an attractive proposition that we are currently considering.
Finally, and from the point of view of risk metrics, the fund continued to trim its delta-one market exposures on valuation grounds prioritizing allocations to delta neutral relative value positioning. As a result, we saw levels of net exposure come down from 76% at the end of December to 64% at the end of January, whilst gross leverage rose from 1.1x at the end of December to 1.5x at the end of January. The picture from a statistical point of view, expressed as 1-day 99.5% confidence parametric VaR, shows VaR increasing marginally from 1.8% at the end of December to 2% at the end of January. If we analyze average daily VaR utilization, we can see that it also increased from 1.6% during December to 1.9% throughout January as the fund deployed more risk to take advantage of short-term tactical trading opportunities associated with the seasonal reopening of primary credit markets.

• Active trading: It uses non-systematic statistical and technical models to identify very short-term investment opportunities (intraday to one week)
• Micro: It selects outright positions in securities which are cheap by historical standards or according to our valuation models based on fundamental and industry specific analysis.
• Macro: Looks to anticipate and exploit trend changes in the main asset classes (fixed-income, equity and forex) through an analysis of market and technical variables.
• Relative value: Non directional long/short or multi-leg trades in single asset, capital structure or across different asset classes that look to profit from relative mispricing opportunities.
• Special situations: highly idiosyncratic event-driven opportunities looking to capitalize on M&A arbitrage, share buy backs, liability management exercises, corporate restructurings, call tenders and any other corporate events.
• Deep Value: Longer term investments in which exceptional value opportunities are linked to a relative lack of liquidity, or investments in securities that require a significant time period (a full economic cycle, market reopening, IPO, etc.) to reach the intrinsic value of the investment.

Rho is a Hedge Fund that has generated an average positive return of 8.4% p.a. for the past ten years with a volatility of 11.1% p.a. 

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