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Latin American Debt Presenting Attractive Opportunities for Hedge Fund Managers - July 2014

by Jesse Fahy

  • 01 Jul 2014
  • HF

While the world turns its attention to Brazil and the excitement of the World Cup, a different competition is underway in Argentina. South America’s second largest economy is currently locked in a bitter court battle with a group of hedge funds who have refused to accept the terms of their sovereign debt restructuring following Argentina’s 2001 default. This case has Argentina at risk of yet another default, and promises a generous payday for those hedge funds that persevered, highlighting the high risks and attractive rewards which are an ever present reality for those who invest in Latin American debt. 

The troubled credit history of the continent mixed with their rich natural resources and growth prospects make Latin America an attractive option for funds seeking high yields. According to Preqin’s Hedge Fund Analyst, there have been 89 hedge funds launched since 2008 which incorporate a strategy of investing in Latin American debt, bringing the total number of hedge funds tracked using this strategy to 148. 

The faith in the Latin American credit markets appears to have paid off so far. Over the past five years, funds which invest in Latin American debt have achieved annualized returns of 10.94%, slightly outperforming the 10.71% annualized returns that have been averaged by credit hedge funds as a whole in the same time frame. These returns further prove the viability of the strategy when compared to the Preqin Emerging Markets – Latin America benchmark which has posted overall annualized returns over the past five years of 9.89%. 

Countries like Argentina, Brazil, Ecuador, Chile and Venezuela entice new investors with their high yields but it is important to understand the risk component involved in investing with these countries. For an example of this risk you need look no further than Brazil and its former billionaire and oil tycoon Eike Batista, who historically fell from one of the ten richest men in the world to facing bankruptcy in less than two years. His cautionary tale along with the recent default of Ecuador and risk of yet another default by Argentina highlights the very real risk that sits as the driving force behind the high yields on the Latin American debt. 

Through May 2014, hedge funds investing in Latin American debt have average year-to-date returns of 1.86%, again outperforming the Preqin Emerging Markets – Latin America benchmark which stands at 0.45% through the same time frame, but trailing all hedge funds which have seen a return of 2.33% so far in 2014. If things go as expected in the courts, these funds investing in Latin America should expect a strong boost to their returns in the form of Argentinian interest payments.

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