Financial Resource

Alternative Latin Investor recently spoke with two high profile hedge fund players in Latin America, Otávio Vieira, Portfolio Manager at Safdié and Carlos Rojas Perla, Chief Investment Officer at Compass Group. We were privileged to hear how both managers felt markets had played out in 2009 and to learn of the themes they expect to dominate in 2010, as well as the strategies they were employing to best harness future returns.

The Hedge Fund Landscape 2008 & 2009

The impact of the global financial crisis was undoubtedly felt by Emerging Market and Latin American focused hedge funds in 2008. Since October 2008 a number of regional fund of funds have disappeared or were forced to merge in order to maintain critical mass and viability. Carlos Rojas Perla at Compass Group believes that assets under management of many funds are still 40% below the levels of two years ago. Indeed Rojas Perla explained that “we haven’t reached the bottom of the crisis in the emerging market fund of funds hedge fund market” and that new monies will predominately come from Family Offices rather than the traditional (fund of fund) investors.

However the majority of redemptions were seen in late 2008 and early 2009 as investors sought to reduce risk profiles in the face of the global economic downturn. In some cases these liquidations triggered redemption restrictions, but certainly with Compass Group this position has since stabilised with withdrawals in 2009 being matched by new investments generating a net/net asset flow position by the year end.

Performance during 2008 was also impacted by the overall global climate and the market saw that the returns of LatAm hedge funds reflected the fortunes of hedge funds globally. Broadly LatAm funds suffered losses of around 20% during this period with the disparity of manager returns low in relative terms, with losses ranging 10% to 35%. However this picture changed markedly in 2009; a resurgence in equity markets and the risk appetites of investors highlighted a spectacular divergence in the performance of different managers and strategies. In this environment the selection of manager and strategies proved crucial. The Safdié fund of funds vehicle achieved 53% – performance that portfolio manager Otávio Vieira was understandably very pleased with, particularly at a time when the performance profiles of different managers ranged from 8% up to 140%. Vieira believes that performance of the Safdié vehicle was aided by the fund’s increased exposure to long only equity strategies, a position which has since closed as Safdié anticipate that in 2010 and 2011 active trading strategies will excel. However, similarly to 2009, maintaining the optimum blend of strategies will be key. The fund is now seeking to increase its exposure to 13 or14 managers from its current stable of ten. This will be achieved whilst ensuring a low correlation between the constituent managers, which is evidenced by the fund’s conducting of due diligence on a New York based operation. In this they are citing the different information flow and mindset that would be provided through the addition of a new perspective.

Expectations & Investment Themes for 2010

Moving into 2010, Carlos Rojas Perla at Compass Group believes that the well organised and well regulated principal LatAm economies of Brazil, Chile, Mexico, Colombia and Peru are in good position to benefit from increased fund flows. He expects growth to be driven largely by the domestic market, which in turn will be dominated by two sectors, the burgeoning High Net Worth retail market (largely accessing more sophisticated strategies via Family Offices) and to a lesser extent, institutional investors. The enlarged coffers of the mandatory pension funds of these five core economies are managed in a sophisticated manner and have been increasing their exposure to alternative strategies such as Private Equity and Real Estate, although to date this has often been achieved through their own vehicles in addition to fund investments.

Despite this growing domestic appetite it is clear that hedge funds will continue their courting of investors from Asia and the Middle East. There is an acute awareness that in the wake of the financial crisis developed markets will be increasingly achieving emerging markets exposure through more liquid instruments such as Exchange Traded Funds. Whilst there has been some interest from these countries, particularly in the commodity and infrastructure sectors, it is felt that this has yet to filter down to the hedge fund arena.

Although ultimately LatAm hedge funds may utilise offshore trading and currency/commodity strategies, rather than direct leveraged plays on the LatAm bourses, the fortunes and interest in the market will doubtlessly continue to be heavily influenced by commodity market strength. With the Latin American market often seen as a function of Chinese growth, its continued appetite for commodities will be a key factor in supporting a sustained recovery.

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