Falling US bond yields and a weakening dollar are contributing to the recovery of emerging-market hedge funds after some managers, including $12 billion in assets Pharo Management, struggled after a rocky start to the year.
Emerging market funds gained 1.9 percent last month, according to data group Eurekahedge, a 1.1 percent lead over hedge funds in general. That leaves them up 5.4 percent this year, still lagging the average hedge fund profit of nearly 8 percent.
Emerging market managers have benefited from a recent drop in US Treasury yields, which rose sharply earlier this year as the easing of coronavirus lockdown restrictions hit investors’ expectations of a strong US economic recovery and rising inflation. increase.
Ten-year government bond yields rose from 0.9 percent at the start of the year to more than 1.7 percent at the end of March as prices fell. However, it has since fallen below 1.5 percent, partly as a result of mounting tensions between the US and China.
Investors often withdraw from emerging markets when US growth picks up and government bond yields become more attractive, but they tend to cash back when US bond yields fall. The dollar’s weakening over the past two months has also helped lower emerging market debt service costs, as much of their debt is denominated in the dollar.
London-based Pharo, led by former Merrill Lynch banker Guillaume Fonkenell and one of the world’s largest emerging markets hedge funds, was hit hard in the first quarter.
The $5.6 billion Gaia and $5.3 billion Macro funds, both of which had made money in the past five years, fell nearly 9 percent and 7 percent respectively in late March, according to figures sent to investors. while fund was down about 11.5 percent. The company had been bullish on emerging markets and some longer-dated emerging market bonds, said a person familiar with its positioning.
However, it has limited some of its losses in the past two months, taking advantage of more favorable conditions for emerging markets. The Gaia fund is down 6.3 percent this year through the end of May, according to people who had seen the numbers. The macro fund is down 4.7 percent, while the smaller trading fund has lost 7 percent, people said.
“The past year has been tough for fund managers” in emerging markets, said Peter Sleep, senior portfolio manager at Seven Investment Management.
Pharo declined to comment on what had driven the performance.
Other funds that have gained recently include London-based Carrhae Capital, which rose 2.7 percent in its hedge fund and 4.5 percent in its long fund last month, according to figures sent to investors. The hedge fund gained 2.1 percent this year, while the Longfonds gained 9.6 percent.
Ali Akay, chief investment officer of Carrhae and former partner at hedge fund SAC, said rising US bond yields had driven emerging market investors from growth stocks to value stocks, benefiting some of their positions.