While the majority of hedge funds in the region have their operations located in the Brazilian cities of Sao Paulo or Rio de Janeiro, Argentina, despite the political and economic uncertainty that continues to affect the country, has attracted its share of funds as well. Almost all funds located in the country are headquartered in Buenos Aires, and use their base in Argentina as an advantage pertaining to investments in the country.
The Argentine market presents significant opportunity for those hedge funds looking to examine: 1) Distressed opportunities in the corporate debt space; 2) Equities that trade at the lowest valuation in the region; 3) Sovereign debt in the local and international market. Argentine corporate and sovereign debt issues have experienced massive rallies in recent months due to declining risk aversion globally and growing confidence that the government of Cristina Kirchner can avoid a sovereign credit event in the near term. Argentina CDS spreads have narrowed from approximately 4,000 basis points at the height of the crisis to 700 basis points currently. Equities have rallied over 100% in the last six months.
After the 2001 debt default and the political noise in recent years, Argentina has not been on the radar of many global or even emerging markets hedge funds. In fact, Argentina's equity market was recently delisted from the MSCI Emerging Markets index, and is now classified as a Frontier Market. Brazil, and to a lesser extent Chile and Mexico, command the majority of investor attention in the region. Consequently, those hedge funds based in Argentina have been, at times, able to benefit from less researched corporate bonds and stocks. While liquidity in many Argentine assets is poor, hedge funds in Argentina typically have fewer assets under management than their Brazilian counterparts and are thus able to traffic in these less liquid assets. Sell-side research efforts focused on Argentina have also been cut back in recent years, as investment banks have reduced costs associated with a small market. This allows local funds to benefit from their in-country contacts, conduct in-depth research efforts not being done elsewhere, and often secure outsized returns as a result. Local funds maintain and develop good relationships with senior management at locally domiciled companies. Given the size of the local market, access to CEOs and CFOs is often easier when compared to other countries in the region or in emerging markets. Furthermore, private equity investment opportunities can present themselves in industries such as real estate and agribusiness at very attractive valuations. Being located in Argentina allows local funds the ability to access these opportunities thanks to their web of contacts.
Argentine assets should continue to trade at a substantial valuation discount when compared to its investment grade rated counterparts in Brazil, Chile and Mexico. Additionally, with a questionable macroeconomic policy mix, investment managers globally may shy away from committing on the ground resources to the country. As a result, those hedge funds located on the ground in Argentina garner the potential to deliver outsized returns in a less competitive marketplace.
Convex Fund is a hedge fund managed from Argentina and specialized in Latin America. The fund is multi-strategy and multi-asset class. The book is divided among several strategies, including but not limited to long-short equities, dollar fixed income relative value, local currency fixed income relative value, Latin American currencies and distress. The Fund's strategy varies according to the global environment and the regional situation, but is flexible enough to shift from purely quantitative-oriented relative value trades to special situations or distressed assets. Generally speaking, Convex follows a top-down approach (i.e., it is a macro fund with focus in Latin America). The exceptions to this rule are the equities and distressed strategies, which are carried out using a bottom-up approach. Management is highly experienced in trading Latin American assets, and has more than 40 years of combined experience in doing so. Management's track record in running Latin assets goes back to the late 1980s, and has 10 years of proven and audited track record managing hedge funds, with an average yearly return of over 15% and virtually no negative years. Although based in Buenos Aires, returns come from different markets, such as Ecuador, Venezuela, Mexico, Brazil and Chile. Convex has presence wherever there is a liquid market to trade and a situation that could generate alpha. Although there have been significant improvements in many of the countries in the region, Latin American markets continue to be highly volatile and politics often way the economic systems. In spite of this, management feels comfortable trading out of such rare environments and usually sees an opportunity even where investing may seem politically incorrect.
Explorador Fund
Explorador Capital Management, LLC is a boutique, multi-strategy investment manager seeking superior returns in emerging markets. The firm was founded by Andrew Cummins in 1996, with support from the Donald Fisher family, founders of Gap, Inc. and Farallon Capital. Mr. Cummins has invested in emerging markets for nearly twenty years. He sits on the board of two publicly traded companies located in Brazil and Chile. He is a graduate of Harvard Business School and UC Berkeley. Explorador has a team of twelve people located in Argentina, Chile and soon Brazil. The fund's primary focus is marketable equity securities, long and short, as well as fixed income.
Since inception of the hedged strategy in January 2004, the fund has delivered annualized returns of 9%, compared to 12% for MSCI Emerging Markets and negative 1.5% for the S&P 500 during that same period. The fund has, since inception, consistently maintained low volatility of 9% on an annualized basis, versus 15% for the S&P and 27% for the MSCI Emerging Markets index. During the challenging period of January 2008"August 2009, Explorador (-4.2%) preserved capital to a much greater extent than emerging markets and U.S. Stocks, both of which are down over 30% over the same time frame. 79% of the time, Explorador's monthly returns have ranged from -2% to +4%, compared to only 34% for the MSCI Emerging Markets index. Explorador places heavy emphasis on capital preservation through different market environments. Explorador offers monthly liquidity and a minimum subscription of US$100,000.
Explorador pursues a hedged approach to investing primarily in Latin America, maintaining a net long exposure ranging from 10% to 50%. Depending on macroeconomic conditions and the overall market environment, the manager uses its discretion to manage net exposure to preserve capital in more turbulent periods, seeking to capture and exceed the longer-term expected equity market returns. Many emerging markets have historically suffered from suboptimal public policy with respect to promoting resilient and sustainable growth. Some of these economies are also inherently more cyclical due to a stronger dependence on commodities prices. Volatility in emerging markets has been higher than in the U.S. and Europe. As a result, our hedged approach has succeeded in delivering superior risk-adjusted returns. Explorador seeks to deliver double-digit absolute rates of return with single-digit volatility.
The Explorador investment team seeks to find businesses going through change. It then engages in a fundamentals-based, bottom-up analytic approach to security selection of firms where that change is not well understood by the market. The seven-person investment team seeks to identify investment opportunities with asymmetric risk-return distribution of expected outcomes and securities that are mispriced. The fund seeks to capture value that will be realized over a six to 24 month time frame. Explorador's investment team engages in over 250 meetings with company management teams per year. Investment committee meetings occur weekly to discuss current portfolio positioning and new investment ideas. Investment team members provide detailed written reports on each company under consideration for the portfolio, and these reports are available to investors.
No region in the world has proven immune from the sharp recessions affecting the United States, Japan and Europe. Emerging markets are no exception. Latin American and other economies are decelerating and expected to post zero or slightly negative growth for 2009, as external demand for raw material exports has fallen dramatically. Importantly, Explorador expects that Brazil, Mexico and Chile, its key target countries, will prevail through this global crisis with no banking system collapse or sovereign credit default. Flexible exchange rates, which have served as shock absorbers, have been key to this resilience. Exchange rates are at much more attractive and competitive levels today. These countries also exercised prudence during the last six years and took advantage of the boom in commodity prices to pay down debt levels and accumulate foreign reserves. Despite slowing economic conditions in Latin America, the major countries are well equipped with fiscal and monetary tools to counteract the slowdown.
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