Emerging markets hedge funds stung in Covid-19 sell-off

Two of the world’s biggest emerging markets-focused hedge funds have suffered large losses as stocks and bonds in the developing world were caught up in the coronavirus-induced rout.

Guillaume Fonkenell’s London-based Pharo Management, which has around $10bn in assets, has suffered a drop of about 13 per cent this month in its $5bn Gaia fund, according to people familiar with its performance. Pharo’s $5bn Macro fund is down about 9 per cent.

And New York-based Autonomy Capital, which was founded by Robert Gibbins and manages around $6bn in assets, has lost 17 per cent, say people who have seen the figures.

Emerging markets have been convulsed by fears over the economic damage caused by the Covid-19 outbreak, at the same time as an oil price war between Saudi Arabia and Russia clobbered several big developing, oil-exporting economies, such as Mexico.

In a letter to investors, Mr Gibbins said he was “disappointed” by Autonomy’s performance and blamed it on what traders call a “value-at-risk shock” caused by these two factors.

VAR shocks occur when volatility spikes so violently that many funds are forced to ratchet back their exposure to several asset classes at once, fanning the flames of a sell-off. This has led investors to say “get me the hell out of here NOW” across all markets, Mr Gibbins wrote.

“The virus and oil price war has resulted in a repricing of assets along with changing fundamentals,” the letter said. “The VAR shock has resulted in a severe dislocation in prices, as investors are forced to sell all assets regardless of quality, fundamentals or price.”

The benchmark MSCI Emerging Markets index is down almost a quarter since the sell-off took hold in the main markets just over three weeks ago, in line with the US S&P 500 index.

Meanwhile, the gap between the average yields on bonds in the JPMorgan EMBI-GD bond index and comparable US Treasuries has spiked to 5.9 percentage points, its widest since the global financial crisis. Yields move inversely to prices.

“People are pretty much selling what they can,” said one bond portfolio manager at another specialised EM fund management company. “Markets are pretty broken.”

Autonomy also suffered a tough time last year when its bets on Argentina were hit by a primary election result in August that knocked the country’s stock market, bonds and currency.

The Argentine government’s plans to restructure its debts has deepened the blow to Autonomy, which had bet heavily on former president Mauricio Macri’s promise to turn one of Latin America’s perennial economic disappointments into a “normal country”.

Pharo has made strong gains in recent years but after the losses this month it is down 8.5 per cent in the Gaia fund this year, while the Macro fund has lost 4.7 per cent, year to date. Pharo declined to comment.

Pharo and Autonomy are among the most influential traders of emerging markets in the hedge fund industry, which predominantly places bets on developed markets.

Emerging markets have recently suffered their biggest cross-border outflows on record, according to the Institute of International Finance (IIF), with non-resident investors withdrawing $55bn from EM stocks in 53 days between January 21 and March 16.

That is double the amount of cross-border outflows seen in the 90 days beginning September 8 2008 — the most intense phase of the financial crisis — according to the IIF.