The Mint Tower Arbitrage Fund aims for a positive absolute return under all market conditions, and has managed to do so since its inception. This makes the hedge fund an ideal shock absorber in investment portfolios.
This is what partner Marcel Voogel (photo, left) and head of investor relations Bart Bijmolen (photo, right) of Mint Tower Capital Management said in conversation with Fondsnieuws, Investment Officer Luxembourg’s sister publication.
The Mint Tower Arbitrage Fund was launched at the end of 2010, and since then has achieved an average annual return of 7.69 percent after costs. Last year at the height of the Covid-19 crisis, the arbitrage strategy proved its defensive value. While the Eurostoxx 50 lost around 29 percent in the first quarter, the fund ended up with only a small drop of 0.8 percent.
The good performance did not go unnoticed by investors. Partly due to the further fall in capital market interest rates, Mint Tower has attracted a lot of new capital from the end of 2019 from family offices, among others. “Investors see us as an alternative to fixed-income securities, as we offer positive returns at low volatility. The return/risk ratio is very favourable,” said Bijmolen.
Assets under management are approaching a billion dollars. “We have the capacity to put away much larger amounts and the markets in which we operate are also sufficiently liquid. But there is still relatively little institutional money in it and pension funds are completely absent. As an absolute return fund, it would fit very well into pension fund portfolios. Moreover, we have now shown eleven consecutive years of positive results,” said Bijmolen.
The fund has proven itself as a shock absorber in a portfolio, Voogel said he believes. “Pension funds are probably hesitant because they do not see our long volatility strategy very often and find it too complex.” However, he does not think this is right. “The bottom line is that we need volatility to be able to make returns and not to depend on the direction of the market.”
Volatility as protection
The fund combines riskier assets with a volatility protection component. For instance, if Minttower includes an ABN Amro corporate bond in its portfolio, it also buys the volatility on the ABN Amro share on the options market. When ABN Amro’s performance is bad, the price of the bond will fall, but the value of the option will rise because of the increase in volatility. The price of an option is determined by the volatility of the underlying share. The more volatile the share, the higher the option premium.
Voogel explained: “If the underlying asset moves more than expected, we make money. And vice versa. If the volatility is as expected, we earn nothing, but we also lose nothing. That is what makes the use of volatility as a protection component so interesting. Because if you protect an equity portfolio with put options, you lose the premium if the market keeps rising.”
Mint Tower is successful with this strategy because it has a very experienced team of thirty option specialists.” The core of the team originally comes from the options exchange and has more than twenty years of experience with this approach”, said Voogel. Before the foundation of Mint Tower, he and the other partners worked at ABN Amro, where they implemented similar strategies.
Pure arbitrage and volatility is one of the pillars of the investment policy. In addition, the fund trades in dividends combined with volatility and has a convertibles arbitrage strategy. “We do not aim for a fixed exposure to a particular strategy, but look opportunistically for the best opportunities. In recent years there have been good opportunities in convertibles, but this year it is a bit less. On the other hand, our dividend strategy on the Eurostoxx 50 dividend futures curve is scoring very well this year. That is the strength of our fund. We earn from volatility in several ways,” said Voogel.
Diversification benefits
Trading in convertibles is not without risk. In 2008, for example, hedge funds with a convertible arbitrage strategy recorded a negative return of 33.7 per cent. But Voogel pointed out that the team does not pursue a classic convertible arbitrage strategy. For example, the fund avoids convertibles with mainly credit exposure, whose strike price is far from the share price. “We are mainly positioned in convertibles that move almost one-on-one with the share, or that are ‘deep in the money’. There is usually a lot of supply here, because institutional investors have to sell such convertibles because of the equity risk”, said Voogel.
When Minttower buys such a convertible, it simultaneously sells the underlying share. “This way the equity risk is zero. If the share goes down fast, the convertible loses much less and we make money with the short position.”
The team currently runs about 600 different positions, which helps spread the risk. Because the correlation with the MSCI World is only 0.24, the fund also offers diversification benefits. The fund does not have a proper benchmark, but compares performance with the world index to show the difference in volatility. “Where the MSCI World shows big peaks and troughs, we aim for the most stable return and capital preservation. Under all market conditions, the aim is to achieve a return of at least 5 percent per year over a period of three to five years,” said Bijmolen.
In years with extremely low volatility such as 2017, Mint Tower can do poorly. “We still ended the year with a positive return of 4.7 percent, but that could just as well have been zero percent or a small minus,” said Voogel. In years when the financial markets are shaken by a crisis, such as the euro crisis in 2013 (+11.8 percent) or corona in 2020 (+14.2 percent), there are many arbitrage opportunities.