Subject: Background for our call tomorrow
From: "Eric Schwerin" <[email-masked]>
To: "Hunter Biden" <[email-masked]>
Date: Thu, 13 Feb 2014 21:06:44 -0500

Nightscape Global Relative Value Fund

Summary

·       $143mm fund based in London focused on Relative Value & special situations with emphasis on European credit and converts.

·       1 of only 3 managers ever seeded by Grosvenor, with additional large NY based multi-family office as anchor investor.

·       Strong value / low net approach with focus on cheap optionality

·       Nick Stukas

o   Promoted to PM at Citadel in 2004 after only two years at the firm

o   Left in 2005 to join Sandelman Partners and in 2007, moved to London to create Sandleman’s European business.  The team he hired in 2007 is the same team assembled at Nightscape.

o   Nick has generated positive P&L in EVERY year since 2004.

o   From 2007 – 09, Nick generated a 8.4% annualized return (up 5% in 2008)

·       Long volatility in Europe, focused on alpha generation & capital protection.

·       -8% correlation to the S&P 500.

·       Portfolio is positioned for asymmetric risk / reward, has cheap optionality, a negative exposure to risk assets, and strong positive convexity if/when risk in Europe increases. 

·       Demonstrable ability to protect capital – generated a positive P&L in 2012 & 2013 when European Central Banks created the narrowest credit spreads in the Crossover Index since 2007, despite having no beta exposure. 

Why This Opportunity Set?

·       European High Yield Market has grown 300% in the past 4 years. 

·       Default rates are increasing

·       Bank balance sheets are pressured

·       Coming wave of debt maturation

·       Little / no growth for over 10 years, bad / worsening demographics, unhealthy banking system, sovereign worries.

·       Can’t adequately address the problem through monetization as per the US, Japan, and UK.

·       Despite these structural issues, the European Crossover Index is nearing historical levels  - spreads are 280 bps – as tight as 2007 due to aggressive central bank actions that are now waning. 

 

Why Nightscape?

·       Approach is to capture individual security price volatility throughout credit cycles. 

·       Nick has traded this space as a PM since 2004 and has generated a positive P&L in every year.

·       Focus is structuring trades with optionality and positive convexity.

·       Proven track record of alpha generation with capital preservation. 

·       Nightscape focuses on relative value and special situations as with a low net exposure, as opposed to most peers who have beta exposure and hedge using indices. 

·       Their portfolio has always been long volatility with alpha generation, which should lead to plentiful opportunities for years to come. 

·       Preservation of capital – in 2012 & 2013, as credit spreads moved in one direction to the tightest levels in years, Nightscape generated positive returns despite not having any beta exposure and long volatility. 

·       Current portfolio has enormous positive convexity if volatility increases. 

·       Few direct peers in terms of portfolio composition. 

Portfolio Composition

Fundamental Value (fundamental credit and equity):  30- 60%

Relative Value (capital structure arbitrage, convertible arbitrage):  40-70%

Subjective comments from Grosvenor (for our internal purposes only):

“Nick is completely uncorrelated to the broad markets, and thus 80-90% of our portfolio.  He’s brilliantly smart, doesn’t lose money, and his portfolio’s risk / reward is completely asymmetric going forward.”

Eric D. Schwerin
[email-masked]

Sent from my iPhone