TOMORR OW’ S TITANS 2023


Nicolas Hamar, Chief Investment Officer Thomas Neveux, Investment Risk Manager Cellyant Capital Management Luxembourg


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ery rarely do you see “securities financing arbitrage” listed as a strategy in hedge fund databases, indices or anywhere else, and this is probably because very few funds are doing it. Cellyant


Capital Management Chief Investment Officer, Nicolas Hamar, recalls that back in 2016, “Initially the Luxembourg CSSF regulator were not sure how to classify the strategy because they had not encountered it before”.


Opportunities for exceptional risk-adjusted returns are hiding in such neglected areas of the market. Cellyant Convergence Fund, a Luxembourg domiciled global SICAV SIF, using Fuchs Management as AIFM and audited by EY, has an extraordinary return profile. Since 2017 it has annualised in low double digits, with low single digit volatility, had no losing calendar years, no calendar months down more than 1%, and drawdowns of even less than the manager’s estimated “business as usual” maximum drawdown estimate of 2%. The return pattern shows a remarkably strong positive skew, which is particularly unusual for a relative value strategy. In the relative value space, mean reversion and reconvergence trades are often characterised as being akin to selling puts, but Cellyant is doing something very different.


Cellyant applies a market-neutral, delta neutral and gamma positive, securities financing arbitrage strategy that is often very close to a pure academic “textbook arbitrage”, in that the anticipated reconvergence is a mechanical process with a clear timeline and end date, based on contract maturities or very high probability corporate events, rather than relying on statistical mean reversion or the consummation of more uncertain corporate events such as takeover offers. (It certainly does not speculate on “rumour-trage”.) The prospectus binds the fund to exceptionally strict limits on net equity exposure, namely 1.5% at position level and 5% in aggregate.


The landscape for arbitrage European policymakers, and some other regulators, have for decades set out lofty ambitions to harmonise and unify capital markets, but the reality is that securities financing markets, including equity-based repoes, continue to exhibit a rich tapestry of intricate quirks and anomalies, even within a single country. Implied financing rates can diverge from implied repo rates and various other financing curves for derivatives. Sometimes the costs might be explicit and separately identifiable line items, and at other times they could be embedded in the pricing of instruments. Term


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Nicolas Hamar + Thomas Neveux


The holy grail of pure “textbook”arbitrage


Thomas Neveux


structures for cash and fixed income can also be asymmetric, with different rates for spot and term financing based on the gradient of various curves.


Why anomalies exist A myriad of reasons can lie behind these differences. Beyond interest rates and exchange rates, the level of short interest, various corporate actions, dividends, credit, regulation, accounting and prudential rules, withholding taxes and financial transaction taxes, and other taxes, can all count towards explaining some anomalies. “There are usually a mix of these reasons, and we do not always know the exact number and type of reasons for the anomaly. There are so many parameters to explain why one entity finds it more difficult to finance than another, and ultimately the subjective funding decision is the most important,” says Hamar, who teaches a course on Delta One Arbitrage at ESLSCA Business School in Paris. Various other market inefficiencies lead the


Nicolas Hamar


divergences to persist. They can include incomplete information; the fact that some participants, such as long only asset managers, face limits on hedging, and legal considerations. There can even be different opinions about how to value a corporate action.


No prime brokers Hamar previously pursued the strategy in a proprietary trading environment at CDC-Ixis/ Natixis, where he was Head of Equity Finance Delta One, and Head of Equity Finance. “For almost 10 years we were the most profitable desk in equity derivatives in Natixis,” he recalls. Nowadays, the banks have become less active in the space due to risks and scalability, leaving prime brokers and other funds as the main competitors.


The Cellyant strategy does not use prime brokers, precisely because it is in some cases seeking to arbitrage discrepancies between the


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