Emerging markets remains the worse performing sector in the hedge fund universe over the past thre...
Emerging markets remains the worse performing sector in the hedge fund universe over the past three years.
Most funds' performance has slipped into the negative and some portfolio managers must be wondering if it is worthwhile investing in the region.
But they are not all performing poorly, or being overshadowed by the convertible arbitrage, event driven and equity market neutral sectors.
The leading hedge fund in this Standard & Poor's sub-section, London-based Montpelier Asset Management's Consulta Emerging Markets Debt Fund, is up 44.66% over three years and 285% since its launch in January 1995. The vast majority of the $143m fund is invested in debt.
One of Consulta's four managers, David Boren, said he was "relieved" with the vehicle's performance, given the state of emerging markets following the Russia and Asian crises in 1998.
Looking ahead, Boren said money will be made by investing in specific value plays rather than ploughing money into an emerging markets theme. Boren believes Algeria offers value opportunities, after recent political reforms in that country. Furthermore, he says, Asian countries including Indonesia, China and Thailand which are continuing to restructure corporate debt also offer specific opportunities for value recovery.
Standard & Poor's statistics, to the end of December, show a slight dip at the end of 2000. This can be explained, Boren said, by the slightly negative sentiment globally.
He said: "Toward the end of last year you still had the expectation that the next move from the Fed would be to raise interest rates. It was only in the fourth quarter that US data showed signs of a slowdown, which favoured a cut in interest rates."
However, Boren said one issue did depress the performance of some emerging markets fund at the end of 2000: "This was concerning Argentina and its re-financing prospects, but that was mitigated by the support it received from the IMF.
"The great success of Argentina has been the introduction of the currency board and it has stabilised the currency. But the drawback of the currency board regime is that you are essentially dependent on foreign currency inflows to generate growth.
"The recent slowdown in Argentina's economy and the inability of the government to expand money supply to support the economy, combined with the deteriorating fiscal picture, suggested Argentina would have a difficult time financing its debt servicing burden going forward."
Looking ahead generally, Boren said there is still scope for continued inflows into the markets and the real focus in 2001 will be on relative value.
He said: "Emerging markets fund managers will have to place greater emphasis on identifying incremental returns through relative value rather than through a general increase in exposure to the market as a whole."
Montpelier believes Algeria, which accounts for 13% of the fund's portfolio, offers good value as it continues to benefit tremendously from the rise in the oil price and this is not fully reflected in the performance of its external debt obligations. Algeria's trade surplus was $3.3bn in 1999, whereas in 2000 it was $10bn.
Borden said: "Russia has also benefited from the increase in the oil price but that has been more significantly reflected in the performance of the Russian market. Algeria, to us, offers more value. That is not to say that you cannot make money in Russia at the moment."
As for other trends in 2001, Boren expected to see a lot of value recovery in the Asia restructuring story."We feel countries such as Indonesia, Thailand and China will look much better at the end of 2001 than they did at the end of last year.
"On Indonesia, the economy has been carried largely by domestic demand and it also has benefited from the oil price. This should tide them over while the remaining companies that have not already restructured their debt complete that process."
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