New Event-Driven Fund In Fast Start

Jan 31 2007 | 4:19pm ET

Christopher DeMuth knows how to manage expectations.

The former Mangan & McColl Partners analyst’s new hedge fund had a big first month, returning 3.28% through Jan. 26—better than three times his target—but DeMuth is more interested in some of the other metrics Rangeley Capital is producing.

The return “is no proof of sustainability,” DeMuth concedes, simply “proof of possibility.” That said, he’s extremely pleased with the young fund’s statistics, including a beta of 18.55% and falling, annualized alpha of 51.19%, a geometric average return of 16 basis points, and a lowest daily return of just -8 bps.

DeMuth founded Rangeley in New York last year, and on Jan. 2 unveiled his first fund, an eponymous event-driven offering with $2 million in assets, with an addition $8 million in commitments. The early going has been good, but, as he points out, in one of the top-performing strategies of 2006, there is no excuse for failure.

“Rangeley Capital launched in the midst of history’s most dynamic market for corporate deals,” he says. “It’s the best environment I’ve seen since 1999, when I started in this space. The opportunities are just fantastic right now, and it’s just a matter of culling them down to a reasonable number of positions. I’ve spent most of my time since the beginning of this month researching 50 different situations, trying to focus on five or ten of them. In other environments, you want 10 positions, but there are really only five worth looking at. That’s not as much fun.”

“On the flipside,” he adds, “now that I’ve said that, I really have no excuse but to perform well. There’s absolutely no excuse I could make based on the world outside my office; it’s everything I could hope for.”

With that in mind, DeMuth is aiming for a return greater than three times the riskless rate of return—for his purposes, the three-month U.S. Treasury bill—while minimizing volatility and with positions sized to limit downside to 3%. He expects to invest in 10 “themes,” totally about 20 to 30 different securities. None of the “theme” sectors will represent more than 30% of the portfolio, and the holding period will average four months. The target geographic allocation is 75% to North America, 20% to Europe and 5% from the rest of the world.

“The fund takes advantage of opportunities offered by the public capital markets in such an environment, so it will be a target-rich environment that will allow us to be highly selective in the investments that we choose to make,” he says. “The investment objective is to achieve superior absolute returns on a risk-adjusted basis.”

For the time being, DeMuth is going it alone at Rangeley; he plans to add two or three analysts through the year. And though, as the portfolio manager of his own fund in his own firm, DeMuth says it doesn’t feel novel. “The analytical role is identical to what I’ve done since 1999”—when he served as merger arbitrage analyst for Swidler Berlin in Washington, D.C.—“and responsibility for positions is identical to what I’ve done since 2002,” when he joined Charlotte, N.C.-based Mangan. What is new to him is raising capital, but DeMuth has cast a wide net. “I’ve had at least one example of every type of investor,” he says.

The new fund charges a 1.5% management fee and 20% performance fee, the latter with a high-water mark. The minimum investment is $1 million, with quarterly liquidity and no lock-up period. Goldman Sachs serves as the prime broker and SS&C Fund Administration Services as administrator.

With $10 million expected in the fund by the end of February, DeMuth is cautiously looking ahead. “I’d probably close it at $100 million,” he says. “I don’t know that it’s going to get there, but I would imagine that I would not want it larger than that.”

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