Ray Bakhramov has been waiting almost two years for his hedge fund’s bet against emerging markets to pay off, which spurred a 20 percent loss in 2012 and cost him clients. Even with a slump from bonds to currencies over the last five months, he’s still waiting.
Bakhramov, whose $180 million Forum Global Opportunities Fund posted gains this year after shorting South Korean and Turkish government debt and wagering against mining and steel companies reliant on developing economies, remains in the red on his bearish outlook. He says his best returns will come once central banks unwind their record stimulus, something the U.S. Federal Reserve unexpectedly refrained from doing yesterday.
‘Bit Disappointing’
Hedge funds haven’t reaped the benefits of the emerging-market selloff because the currencies that fell the most this year aren’t easily bet against, some managers put on the wrong trades and volatility made it hard to stay in positions, investors said. What’s more, the worst of the emerging-market selloff may have already passed, analysts at Barclays Plc and JPMorgan Chase & Co. predict.
Brevan Howard
The $2.7 billion emerging-markets fund at Brevan Howard Asset Management LLP, Europe’s second-largest hedge-fund firm, declined 12.7 percent this year through Sept. 13, and New York-based QFR Capital Management LP, a $3.5 billion firm that invests in developing nations based on macroeconomic trends, lost 13.4 percent in its fund through August, investors said.
Fed’s Strategy
While booming economies such as in China, Brazil and India have been fueled by consumer demand, the bearish case against emerging markets is based on the view that global capital flows have primarily sparked asset gains. The combination of slower growth and the Fed curtailing its monthly bond purchases will accelerate the pace of redemptions, triggering a slump for stocks, debt and currencies, Bakhramov and other hedge-fund managers predict.
Currency Bets
The rupee and rupiah aren’t liquid enough to bet against in a meaningful way, leaving hedge funds to focus bearish wagers on currencies such as the South Korean won, which should fall if economic growth in China slows, Lawler said. The won trade hasn’t worked this year, as it’s gained 3 percent since May 22.
‘Significant Weakness’
Jen, whose firm also helps institutions and corporations hedge their risk to currency moves, remains convinced that the worst is yet to come. In a note to investors this month, he said the International Monetary Fund estimates that investors pumped $7.7 trillion into emerging markets over the past decade. Data indicate that just 10 percent of that has been pulled, and the Fed hasn’t even started tapering, Jen said.
Fund Gains
Jen’s SLJ Macro Fund, which trades developed market and emerging-market currencies based on global macroeconomic trends, rose 13.3 percent in the first eight months of this year and is up 15.7 percent since it started trading in November 2011, the letter shows. Unlike most hedge funds, SLJ reports its performance excluding fees. The fund charges management fees ranging from 1.5 percent to 2 percent to oversee clients’ money and pockets either 15 percent or 20 percent of any investment gains it makes on trades, according to the investor note.
Difficult 2012
Then came 2012. Bakhramov positioned his portfolio for an emerging-markets slump and lost 20 percent. The hedge-fund industry rose 6.4 percent last year. Bakhramov told investors in his New York-based Forum Asset Management LLC that he watched in disbelief as central banks continued to pump endless amounts of money into the global economy.
Ali Akay
The September rally shows “people are still complacent that the Fed will take care of every problem,” Bakhramov said. “The mistake that people are making now is that they have accepted that emerging markets are an issue, but they don’t think it will be a big issue. We have our doubts.”
No Clarity
In a short sale, traders bet stock prices will fall by borrowing shares from a broker and selling them. They plan to buy back the stock at a lower price, return the shares to their broker and pocket the difference as profit.
Investors should probably avoid hedge-fund managers wedded to either bullish or bearish views on emerging markets until there’s more clarity about the effects of the Fed curtailing its stimulus and the turmoil in the Middle East over Syria, said Alper Ince, who helps oversee $9 billion at Pacific Alternative Asset Management Co. in Irvine, California.
“You want someone who can trade these markets nimbly, going both long and short,” said Ince, whose firm invests in hedge funds on behalf of clients. “Emerging-markets underperformance looks overdone to me since May, but I’m not in the position to say now is the time to load up on exposure because there is so much uncertainty.”
