EM debt hedge funds play safe amid rally

Time of India

7 days ago

"It is very hard to predict what they will do next with tariffs, and on top of that you have ongoing wars," Efstathiou said.
Emerging-market debt hedge funds, boasting impressive double-digit returns this year, are strategically mitigating risks amidst a deepening rally. Funds are swapping longer-maturity bonds for shorter-dated ones, prioritizing higher-rated, liquid securities, and increasing cash reserves. This cautious approach addresses uncertainties stemming from US policies, global conflicts, and tight pricing, while still seeking selective opportunities for further gains.
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Hedge funds dedicated to emerging-market debt are increasingly turning to risk-mitigating strategies to ensure they lock in double digit gains as a broad rally in developing nation assets deepens.After a banner first half of the year, hedge funds targeting EM debt have returned nearly 13% on an annual basis-more than their peers positioned in any other asset class, according to data based on Bloomberg indexes.The latest global financial flows data shows the asset class remains thriving and the extra yield investors demand to hold the sovereign debt of developing nations over US Treasuries just hit a 15-year low. Such tight pricing, along with uncertainty over US policies and global conflicts, is pushing hedge funds to curb risks as they ride the historic rally. The funds do this by swapping longer-maturity bonds in their portfolios for less risky shorter-dated ones. They also focus on higher-rated debt and the most-liquid securities while keeping an ample cash pile."Do you just want to be massively long on credit on these valuations? I'd say probably not," said Anthony Kettle, who co-manages BlueBay Emerging Market Unconstrained Bond Fund with Polina Kurdyavko and Brent David. "Having a little bit of dry powder evidently makes sense, and also running elevated cash levels."To be clear, Kettle said, there's still a "decent environment" to gain additional returns as funds become more selective and can profit from both rising and falling asset prices, unlike index-based investors. The $784-million BlueBay fund has returned 17% over the past 12 months.Investors have taken advantage of EM inflows stoked by increased interest for alternative assets amid US policy unpredictability, which has also weakened the dollar. While many developing countries have come out of distressed debt levels as sentiment improved, further risks include another Iran-Israel flare up and potential additional increases in US tariffs, including on the buyers of Russian energy.President Donald Trump's administration has caused a "breakdown of the traditional safe haven correlations" by shaking up the post-Cold War world order, creating an "unusual and unpredictable" environment, said Demetris Efstathiou, the chief investment officer of Blue Diagonal EM Fixed Income Fund."It is very hard to predict what they will do next with tariffs, and on top of that you have ongoing wars," Efstathiou said.