Shortage of EM Credit Hedge Funds

Date: Friday, December 3, 2010

Emerging markets credit has grown as an asset class and should have an important role to play in any institutional investor global portfolio. However, investors are struggling to find robust EM credit hedge fund managers that offer something more than simple beta risk to EM sovereign credit spreads.

EM sovereign credit spreads have already tightened significantly over the last 18 months. Five years credit default spreads for Brazil and Colombia have tightened from over 400bps to just 115bps. Even Kazakhstan has tightened to just 182bps from 1,600bps in March 2009. It seems that the sovereign beta trade is over and investors should focus in event driven opportunities in corporate debt.

EM debt has experienced low price volatility during the European Sovereign credit crisis as the local investor base keeps growing. However, EM corporate debt (both Investment Grade and High Yield) still trades with a considerable premium to developed markets corporate debt. Appetite for EM credit remains strong but, there are not that many funds with the required expertise and track record in EM credit.

The Finisterre Credit Fund is an exception. The fund is managed by RafaŽl Biosse Duplan. The team seeks to generate absolute returns by exploiting credit event-driven situations. The fund follows a bottom-up approach rooted in fundamental credit, asset valuation and documentation analysis.

The fund was launched in February 2006 and has a good track record. In 2009 the fund was up +45.45% and in 2010 the fund is up +13.22% (YTD including November) while maintaining a conservative investment strategy and high levels of cash. The team benefits from the synergy effects of working at a hedge fund firm dedicated to emerging Markets. Finisterre Capital ( is a London based asset manager with AUM of $1.3billion across five EM funds.

EM credit markets and investor base are expected to continue expanding over the next decade. However, there is a lack of human capital with experience trading corporate credit in areas as diverse as Asia, Latam or CEEMEA. Even the skilled traders do not have experience running or working within a hedge fund structure.

Most institutional investors consider they are underinvested in EM corporate credit. Portfolio optimization techniques suggest higher allocation to EM corporate credit. However, there is a supply/demand imbalance as institutional investors are struggling to find robust EM credit hedge fund managers with acceptable operational infrastructure and reliable track record. We believe that the imbalance will remain as investment banks are fighting to retain talent in this booming business area.