|
In contrast to how hedge
funds evolved elsewhere, and in particularly
in Asia, in Latin America the dominance
of fixed income and debt markets explains
the creation of many macro and multi-strategy
funds, in detriment of other strategies,
including equity long/short.
That is beginning to change.
In the last 18 months, we have seen an
increase in the number of new long/short
managers setting up in the region. Among
those funds, it is possible to identify
classic Jones-model funds, funds with low
net exposure, and funds which emphasise
pairs trading. Contrary to how this industry
looked like a couple of years ago, now there
is enough diversity in terms of style and
it is no longer a group of quasi mutual
funds which simply protect part of the long
book by shorting the index.
Currently, there are roughly 301 equity
long/short funds with a 100% focus on Latin
American markets. In addition to that, there
are at least 25-30 managers who cover global
emerging markets and thus keep a reasonable
exposure to the region.
There is an understandable predominance
of Brazilian equities in the portfolios.
The traded volume of the local equity markets
is around US$1 billion per day, of which
more than 2/3 is in Brazilian stocks; the
market cap surpasses US$750 billion (US$350
billion is Brazil) and the total number
of listed companies reach 1,400 stocks (360
in Brazil), of which 300 names probably
with reasonable liquidity (that figure includes
the ADRs in NYSE). Compared with Asia (where
India alone has more than 6,000 listed equities),
this is still a fleabite, but the number
is growing rapidly.
There are three key drivers of this recent
phenomenon: a) availability of shorts, b)
higher quality and more experienced managers
and c) increase of liquidity.
- Availability of shorts: it is possible
to short stocks at a decent cost, sometimes
as low as 2-3%. Besides, there is a reasonable
menu of derivatives to play with, index
futures, options, including derivatives
on liquid ADRs;
- Higher quality managers: the migration
of traders from prop desks and private
pools of capital to the hedge fund industry
has raised the bar in terms of experience
and skill;
- Increase of liquidity: this is particularly
beneficial for the mid and small cap names,
which so far have only attracted the attention
of small boutiques and specialised funds
In our opinion, the availability of shorts
and higher quality managers consist in irreversible
and structural drivers for this strategy.
However, as we have seen in the past, liquidity
can oscillate more than one portfolio manager
might expect and therefore liquidity risk
is something that any allocator looking
at this industry should be extremely careful.
Finally, similarly to Asia, the opportunity
in Latam is clearly the information arbitrage-getting
to know who the good local players are still
gives an edge to an allocator. We see more
alpha generation and added value in the
locally-based managers who have a better
information flow than managers based in
London or New York. One supporting argument
for this thesis is that recent academic
research has shown that there is little
cointegration among Latin equity markets
although there is some cointegration between
Mexican and US equity markets2.
If it is true that correlation among Latin
markets has decreased, then the access to
information becomes even more critical and
might explain the outperformance of local
managers.
Footnotes
1. Eurekahedge lists 14;
GFIA sources account for about the same
again.
2. TABAK, Benjamin and LIMA, Eduardo-"Causality
and cointegration in Stock Markets-the case
of Latin America", Brazilian Central
Bank working paper series, Dec 2002; PIESSE,
Jenifer and HEARN, Bruce-"Transmission
of Volatility across Latin American Equity
Markets: Tests of Market Integration",
research paper 015, King's College London,
Nov 2002; GARRETT, Ian et al.-"The
Interaction between Latin American Stock
Markets and the US", Manchester Business
School, Dec 2004.
|
