BlueBay’s EM hedge fund returned 21% last year vs 14% average
Trump tariffs create opportunity to add assets at lower prices
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RBC BlueBay Asset Management’s hedge fund is seeing an opportunity to profit from volatility during US President Donald Trump’s second term, after outperforming the industry in a difficult period for emerging markets. The $133 billion fixed income specialist’s emerging-market credit alpha fund returned 21% last year, after fees, following a 18% performance in 2023. That compares with 2024 average returns of 14% for EM debt hedge funds, according to a Bloomberg index. The fund’s mandate allows it to borrow bonds and short-sell, a classic hedge fund strategy that is poised to be useful amid the market turbulence expected from China to Mexico during Trump’s term. As the president’s first week in office proceeded, traders were still parsing his pronouncements for clues on how he will end up regulating trade.“This year it’s about the US policy agenda,” Anthony Kettle, one of the co-managers of the $600 million fund, said in an interview. “There will still be quite a lot to do in idiosyncratic EM events, but a lot will be coming from the US policy agenda and it will create long opportunities as well as short opportunities.”
‘Harrowing Time’
While the last five years have been a “pretty harrowing time” for developing markets as a whole, that still coincided with the best period for the RBC BlueBay fund, said Kettle, who helped produce annualized net returns of 11% on a five-year basis.“ The reason it’s done very well is because it’s been actually just a period of volatility,” said Kettle, who is part of a team managing as much as $15 billion in funds overall. “You’ve been able to make some money on the longs, money on the shorts.” Emerging-market debt has weathered the volatility so far this month, set for a 0.5% gain for dollar bonds and 1% return for local-currency debt, according to Bloomberg indices. If Trump makes good on pledges to impose tariffs on US imports, “that would create a big market dislocation which would then offer an opportunity for the fund to add assets at extremely cheap prices,” Kettle said. Large developing countries like Brazil, Mexico and China have active CDS markets which allow investors to express short views. But when that is not the case, such as for frontier and high-yield credits like Nigeria and Ghana, or some corporates, the firm borrows bonds and short-sells them in the market to ride the volatility.
Tariff Agenda
Kettle sees the biggest shorts in the Asian currency markets, and he thinks Trump will comparatively spare other countries. “We think the tariff agenda is more likely to be targeted toward Asia and therefore Asian currencies are more likely to be the ones that adjust versus the dollar,” he said. “The tariff agenda toward Latin America, for example, or even Canada, we view that as more of a negotiating tactic.” Mexico could even become a beneficiary of Trump’s policies in the medium term, he said. The rally in Argentina’s assets may also have some room to run if President Javier Milei’s government manages to gradually lift capital controls. “If they can regain market access, that’ll be a very, very important event,” he said.
Middle East
“We’ve been short in some countries within the Middle East because we think spreads look quite tight, but also because we think there is significant supply still to come,” Kettle said. Long positions also take up a substantial part of his portfolio thanks to positive factors such as a “fairly benign” default rate outlook in the asset class. “If you look at all-in returns for a year, I would expect that you see reasonably positive returns at the hard currency index level.” Egypt sill provides very high levels of carry and investors may start looking to extend duration in Turkey local debt as inflation is coming down, he said. Some of the attractive long positions are in recently restructured bonds of frontier markets, where leverage is on a downward path and finances are sustainable, and where coupon payments have resumed, Kettle said. Investors have more visibility on Zambia, Sri Lanka and Ghana, where they can “harvest yield” for one to two years even if the longer-term outlook remains less clear, he said.
Romanian Elections
“We’re actually expressing a short view in some of the investment grade names and then we’re long of some of the CCCs but also some of the double B names and a little bit of frontier,” Kettle said. Aside from US policy, Kettle said markets will be watching elections in developing countries, such as Ecuador in February, and the re-run of Romania’s presidential ballot, scheduled for May. Strong correlations with the euro are making him cautious on currencies in the east of the European Union, he said. Investors are especially concerned about Romania’s fiscal consolidation plans, and Kettle said that theme would likely be playing out across the globe. “Fiscal is the big theme that’s running through emerging markets this year, and to be fair through developed markets as well.”
— Reporting by Selcuk Gokoluk and Andras Gergely, with assistance from Nishant Kumar