MANAGER PROFILES Series features: Andrew Cohen, Co-Founder & CIO, Difesa Capital

(Click image to play) In this episode of the Manager Profiles series, Andrew and I talk about Difesa Capital and their versatile investment strategy, designed to take advantage of changing market environments.

Show Highlights

In this episode, Andrew and I talked about:

  • Difesa’s unique special situations strategy that uses a ‘three-legged stool’ approach, designed to capture equity-linked convexity while having limited beta to equity markets and limited volatility.

  • How Andrew’s 23 years of investment experience, spanning every corporate-financed-based hedge fund strategy, has culminated into his unique approach at Difesa.

  • How Difesa is not ‘pigeon-holed’ and able to take advantage of multiple verticals.

  • How Difesa manages risk at the position level and at the portfolio level.

  • Lessons learned over 20-plus years of investment experience.

  • Difesa’s focus for 2023.

Key Quotes/takeaways

0:59 | “…Difesa’s main strategy is really focused on special situations where we’re looking to capture yield from investors that has limited beta to the overall market, while also capturing equity convexity to the upside. We want to have limited beta to the equity markets and limited volatility to provide something that’s a bit more stable, but where on occasion, when we get things right, equity-like returns can shine through the portfolio.”

3:10 | “The name Difesa itself is ‘defense’ in Italian. So we’re always thinking about how to protect the downside, while capturing a yield for our investors across the portfolio and that equity optionality to the upside.  And we do that sort of through a ‘three-legged stool.’ We will use multiple different asset classes.”

5:22 | “I think our differentiation, and where there aren’t very many peers for us, is that we’re doing all of these things in one unique format together, and it allows us to have an evergreen strategy across the cycle.”

10:00 | “You always have to be able to change course, and having these different tools that we have enables us to change course, when the opportunity presents itself.”

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Full Transcript

Jennifer Bruno | 00:09

Welcome to Hedge Interview. I’m Jennifer Bruno and this episode is part of the Manager Profiles Series, which features distinguished asset managers with a unique approach in their strategy space. My guest today is Andrew Cohen. He is a co-founder of Difesa Capital, and he is the firm’s Chief Investment Officer. Prior to founding Difesa, Andrew co-founded the Ramius Event-Driven and Arbitrage group within Cowen Investment Management. He has 23 years of investment experience focusing on special situations, event driven arbitrage, private equity, and distressed debt strategies. Thank you for joining me today, Andrew.

Andrew Cohen | 00:53

Great, thanks for having me Jennifer. It’s good to be here.

Jennifer Bruno | 00:55

So tell us about Difesa.

Andrew Cohen | 00:59

So, you know, you mentioned, I’ve worked across a lot of different strategies. And when I was thinking about starting something new, I really wanted to focus on something that had limited downside, but optionality to the upside. And so Difesa’s main strategy is really focused on special situations where we’re looking to capture yield from investors that has limited beta to the overall market, while also capturing equity convexity to the upside. We want to have limited beta to the equity markets and limited volatility to provide something that’s a bit more stable, but where on occasion, when we get things right, equity-like returns can shine through the portfolio.

Jennifer Bruno | 01:46

Okay, and so tell me a bit about your background and how you got into this,

Andrew Cohen | 01:51

Sure. So I’ve been in the business, as you said, I’ve been in the hedge fund business for 23 years, and was fortunate to work at a large multi strategy hedge fund called Ramius for the majority of that time. And while I was there, I really worked across every corporate finance based hedge fund strategy, you can think of whether it was long short equity, or activist investing in deep value, small cap equities, or convertible bonds, or warrant arbitrage or merger arbitrage, or distressed debt. And so I think something unique that I bring to the table is that I have a breadth of knowledge about how to use different securities and different products across the spectrum. Whereas I think a lot of people today are really focused on one particular vertical. My background really spans multiple verticals, which really enables us to do some interesting things at Difesa.

Jennifer Bruno | 02:55

And so that really dovetails right into your specific approach and your strategy. So tell us about how your strategy works. What are you how, how are you achieving your goals within this strategy, tell us how it works.

Andrew Cohen | 03:10

Sure. So you know, we’re looking to generate returns that sort of bridge fixed income to to equity-like returns, and we’re looking to protect downside. The name Difesa itself is ‘defense’ in Italian. So we’re always thinking about how to protect the downside, while capturing a yield for our investors across the portfolio and that equity optionality to the upside.  And we do that sort of through a ‘three-legged stool.’ We will use multiple different asset classes.  One asset class that I’m sure many people have read about over the past couple years that has had a boom and bust is the SPAC asset class where we’ve been able to extract a lot of value and have developed, you know, a strong track record, and really weren’t dragged down in that boom and bust.  Another one is convertible bond market, where typically when you have bear markets, like we lived through in 2022, you can see significant corrections and tremendous opportunity, which is a cyclical thing that I’ve seen happen multiple times in my career. And so we can use the bond portion of the convertible bond to capture that yield. Or we can look to capture optionality through the call option that’s embedded in the convert.  And then we can use equities and we can use other equity-linked securities like warrants or listed options to express our views. So whether it’s in SPAC securities or in convertible bonds, or in equities and warrants, we can utilize all these different tools to express views and create trades that we believe have limited downside and will generate a return, but often have this optionality to the upside.

Jennifer Bruno | 05:05

And your strategy seems unique to me. I don’t know of, I haven’t come across many doing what you’re doing. But if you do have peers, in your, in this particular space, how would you differentiate? What would you say is your point of differentiation?

Andrew Cohen | 05:22

So I think we’re differentiated in that there aren’t very many funds that are just focused on what we’re doing. I think all the things that we’re doing, you would find inside of a large multi-strategy firm, and there would be a convert guy who maybe did some SPAC stuff. Or there might be a guy who just did warrarnt arbitrage or warrant vol trading, or there might be a guy that just did value equities. And so I think our differentiation and where there aren’t very many peers for us is that we’re doing all of these things in one unique format together, and it allows us to have an evergreen strategy across the cycle. In a time when there may be less to do in the SPAC market, there’s more to do in the convertible bond market. Or if there’s less than doing the convertible bond market, there might be more to do in orphaned equities or small cap equities.  And I think our ability, my partner, Greg Davis, and I, our ability to look across asset classes, whether it’s debt, whether it’s equity, or whether it’s a derivative, is really, you know, a differentiator for us and how we can take this lens of looking for asymmetric risk reward trades, and apply it, whether it’s to one asset class or another, we’re really coming at everything from a process perspective, the same way, using our skill sets that are supported by you know, 20 plus year careers in the industry across these different types of investing.

Jennifer Bruno | 06:59

And what would you say drives your decision making across these asset classes? You know, what, what is the driver that would make you focus on one sleeve versus another?

Andrew Cohen | 07:11

So I think, first I’ll come back to that question. But I think, you know, when thinking about our decision making, in particular, over the past year or so, we always have to think about the macro, and what’s going on more broadly. And that, you know, will influence how we size the portfolio, how we utilize leverage in the portfolio, and how much equity exposure we might want to have in things like equities or warrants versus how much exposure we might want to have in something like bonds or SPAC cash yielding securities that are more safe, right. And so, certainly, thinking about the macro environment, influences our decision making at the portfolio level.  And then at the individual, position level, really, what influences influences us, at the end of the day, is the risk-reward of a trade. And, you know, we’re looking for things at a minimum, where maybe if we lose, it’s one down, and if we win, it’s three up, right. And that three to one risk reward is sort of the bar that we’re looking to achieve in any type of trade. And, as I said before, then we can be kind of agnostic between these different sub asset classes and have pieces of the portfolio in each of them at any given time. And depending on what the macro environment is, we might want to lean one way or another. You know, in 2022, we had a lot more exposure to SPAC cash yielding securities, because they’re very low beta, and they’re very safe. And there was a lot of volatility in the market was contending with, you know, the changes in an interest rate cycle, and a revaluation of the equity market. And we felt that that was a safe place to generate a return for our investors. Whereas coming into this year, you know, we, we view it as sort of, we’re coming to the end of that interest rate cycle, inflation is starting to come under control a bit, maybe not altogether, but a bit. And so we’re allowing ourselves to have a little bit more equity exposure, and a little and certainly more convertible bond exposure.

 Jennifer Bruno | 09:32

It’s great that you have that flexibility to, kind of, move where you need to move where it makes most sense.

 Andrew Cohen | 09:38

Yeah, it makes it so that we’re not pigeon-holed into any one thing. And, you know, as the market changes, we can change. You know, I listened to a podcast actually recently with the pilot Sully, who landed the plane in the Hudson River.

Jennifer Bruno | 10:00

Right.

Andrew Cohen | 10:00

And he was being interviewed as they were, they were dedicating the Aerospace Museum in North Carolina, where he’s from, to him and the crew of that. And as he was being interviewed, they were asking him, like, you know, what are the sort of reflections you have on life and after this experience, and he said, you know, you always have to be able to change course, and having these different tools that we have enables us to change course, when the opportunity presents itself.

Jennifer Bruno | 10:29

And it can be so critical. Yeah, so that’s really good. And tell me about your team and how you guys work together? How long have you known each other? And how you how you work together?

Andrew Cohen | 10:42

Yeah, so my partner, Greg, he’s really my peer, you know, we are very collaborative, we like to look at all our ideas together. At the end of the day, I get the final say, but it’s a very collaborative approach. And I think we’re very fortunate in that our trader Gambrelle Snyder, she’s been in the business for over 20 years, and our head of operations, our COO Evan Fochios, he’s been in the business for over 20 years. And we’ve all worked together before we all work together. Ramya said, various points. And so there’s a lot of continuity in the group. And Gambrelle can really deal with the trading and deal with our counterparties. And Evan can really manage all of our outsourced service providers, our back office, and our middle office and allow Greg and I to focus on the portfolio, and managing risk. And that’s, you know, for an emerging fund, a great luxury to have. And it’s a it’s a great team that we have put together and great that we have long history together.

Jennifer Bruno | 11:57

That long history is so key, it really helps a group have cohesion and efficiency, when you just know how to work together over a period of time, that’s really great. What is your approach to risk management.

Andrew Cohen | 12:14

So when it comes to risk management, we think about it in two ways, you have to think about it at the portfolio level. And at the individual position level, you know, and then at the portfolio level, for us, the keys are really managing our leverage and our duration in the portfolio. And we’re constantly measuring that and managing that, depending on you know, where we are in the cycle, and what the opportunity set is that we’re presented with. And, you know, with the volatility last year, we took leverage up as an opportunity to buy very high yielding SPAC securities. And now, as we are allowing ourselves to have some more equity exposure, we’re bringing our leverage down, because, you know, we’re not utilized when it’s not necessary to utilize it as much, given the upside and the convexity that we think we’re creating in the portfolio, and all of the warrant exposure that we have built up over the past several years.  At the single position level, every position starts with downside risk assessment, right? Before we’re really thinking about how much money can we make in this trade, we’re first thinking about how much money could we lose in this trade. And that comes from both Greg and my background in merger arbitrage where if a trade goes against you, you know, you could be down 30 or 40%. And so every trade has a downside level associated with it, whether it’s a downside price in the stock or a yield, in a blowout yield scenario for a bond or a SPAC piece of paper. And, you know, how much are we willing to lose? You know, we generally don’t want to lose more than 1% or half a percent in any one position if it goes the wrong way. But like I said, we’re looking for three to one risk rewards. So if we’re setting up trades, where you know, we could lose half a percent, right, then we could be making a percent and a half on the upside, maybe more. And that helps to keep things very tight. So measuring and managing single name risk, as well as portfolio level risk are important to us.

Jennifer Bruno | 14:28

Great, that’s super important as you know, to investors that the end you guys have a really comprehensive approach that’s that they were you really focusing on it, so that’s really important. And what about what would you say is an important lesson learned or lessons learned in your time so far with Difesa that you’re bringing with you into 2023?

Andrew Cohen | 14:50

I don’t know about necessarily just Difesa, but in my career, you know, I would say one thing is that the market can remain irrational longer than you think. And so you know, you always have to be prepared for that and assessing your risk, as things don’t always play out on your timeline. I would also say that, something I learned from my my past partner is that edge is ephemeral. And that if you have edge in a trade, if you have a piece of research or you, you have a trade that sets up in a particular way, it may not be there for that long. And you have to take advantage of it and size up into those situations when you really have the opportunity. And lastly, and in particular, as it relates to the way this year has started out with the markets really tearing to start the year. You know, it’s never good to chase the market. And nothing good ever comes of that. And, you know, you may have underperformed for a time, but when you chase you end up, you know, getting yourself in trouble. And that’s not a good thing to do. You have to stick to your knitting.

Jennifer Bruno | 16:05

Yep! And what are you focused on right now? What has your attention maybe in the global macro sense?

Andrew Cohen | 16:13

So we’re certainly focused on interest rates that are continuing to rise, and how that’s going to affect valuations in the equity market, and constrain the supply of money and the availability of liquidity. But from a micro point of view, or from a portfolio point of view. You know, there are so many companies that have come public between 2019 and 2021, even some in (20)20, at the beginning of (20)22 that are really orphaned and have been forgotten about it. The old adage of the baby being thrown out with the bathwater. So we’re focused a lot on small cap companies, where we see asymmetric risk reward opportunities.  And in the convertible bond market, convertible bonds in 2022, we were faced with two headwinds, not not only were they being repriced, because interest rates were repricing the bond portion of the security, but the equity portion of the security was being repriced as equities were selling off. And so that was sort of a perfect storm for that asset class. And according to Bank of America, it was the worst year for convertible bond since the financial crisis in 2008. And over at by mid December of last year, over two thirds of the convertible bond market was trading below par. And so we see a big opportunity they’re in what we call ‘busted converts’ that are out of the money, where we can really add value through our credit underwriting and our equity underwriting to find hidden hidden yield and hidden optionality.

Jennifer Bruno | 17:56

That’s exciting. That’ll be it’ll be interesting to keep an eye on you guys and see how those developments play out.  So

Andrew Cohen | 18:03

Yeah, absolutely.

Jennifer Bruno | 18:05

It’s exciting. Well, thank you so much for joining me today. This is a great interview and it’s great to learn about Difesa.

Andrew Cohen | 18:14

Great, appreciate you having me and we look forward to staying in touch.

Jennifer Bruno | 18:19

So for more information, for everybody who wants to look a little bit more on Difesa Capital, you can visit their website at difesa.com

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