US bond rally eases pressure on emerging market hedge funds

Falling United States bond yields and a weakening dollar are assisting drive a healing in emerging market-focused hedge funds, after some supervisors consisting of $12bn-in-assets Pharo Management had a hard time following a hard start to the year.

Emerging market funds got 1.9 percent last month, according to information group Eurekahedge, ahead of a 1.1 percent gain amongst hedge funds more broadly. That leaves them up 5.4 percent this year, still behind typical hedge fund gains of almost 8 percent.

Emerging market supervisors have actually been gaining from a current decrease in United States Treasury yields, which skyrocketed previously this year as the easing of coronavirus lockdown constraints raised financier expectations of a strong United States financial healing and increasing inflation.

The 10-year Treasury yield skyrocketed from 0.9 percent at the start of the year to more than 1.7 percent at the end of March as rates fell. Nevertheless, it has actually considering that fallen back listed below 1.5 percent, driven in part by increasing US-China stress.

Investors often pull out of emerging markets when US growth picks up and Treasury yields become more attractive, but they tend to pour money back in when US bond yields fall. The weakening of the dollar over the past two months has actually also helped to push down the costs of servicing debt in emerging markets, as a lot their debt is denominated in the greenback.

Line chart of US 10 year bond, yield % showing US treasuries have rallied

London-based Pharo, which is headed by former Merrill Lynch banker Guillaume Fonkenell and which is one of the world’s biggest emerging markets hedge funds, was hit hard in the first quarter.

Its $5.6bn Gaia and $5.3bn Macro funds, which had both made money in each of the past five years, were down nearly 9 per cent and 7 per cent respectively at the end of March, according to numbers sent to investors, while its Trading fund was down around 11.5 per cent. The firm had been bullish on emerging markets and on some longer-dated emerging market bonds, said a person familiar with its positioning.

However, it has pared some of its losses over the past two months, benefiting from the more favourable conditions for emerging markets. Its Gaia fund is now down 6.3 per cent this year to the end of May, according to people who had seen the numbers. Its Macro fund is down 4.7 per cent, while its smaller Trading fund has lost 7 per cent, the people said.

“The last 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 performance.

Other funds that have gained recently include London-based Carrhae Capital, which was up 2.7 per cent in its hedge fund and 4.5 per cent in its long fund last month, according to numbers sent to investors. The hedge fund has gained 2.1 per cent for the year, while the Long fund has gained 9.6 per cent.

Ali Akay, Carrhae’s chief investment officer and a former partner at hedge fund SAC, said that increasing United States bond yields had driven emerging market investors from development stocks into value stocks, which had actually benefited a few of its positions.

laurence.fletcher@ft.com

Jobber Wiki author Frank Long contributed to this report.