While the majority of hedge funds in the region have their operations located in the Brazilian cities of Sao Paulo or Rio de Janeiro, Argentina, despite the political and economic uncertainty that continues to affect the country, has attracted its share of funds as well. Almost all funds located in the country are headquartered in Buenos Aires, and use their base in Argentina as an advantage pertaining to investments in the country.
The Argentine market presents significant opportunity for those hedge funds looking to examine: 1) Distressed opportunities in the corporate debt space; 2) Equities that trade at the lowest valuation in the region; 3) Sovereign debt in the local and international market. Argentine corporate and sovereign debt issues have experienced massive rallies in recent months due to declining risk aversion globally and growing confidence that the government of Cristina Kirchner can avoid a sovereign credit event in the near term. Argentina CDS spreads have narrowed from approximately 4,000 basis points at the height of the crisis to 700 basis points currently. Equities have rallied over 100% in the last six months.
After the 2001 debt default and the political noise in recent years, Argentina has not been on the radar of many global or even emerging markets hedge funds. In fact, Argentina’s equity market was recently delisted from the MSCI Emerging Markets index, and is now classified as a Frontier Market. Brazil, and to a lesser extent Chile and Mexico, command the majority of investor attention in the region. Consequently, those hedge funds based in Argentina have been, at times, able to benefit from less researched corporate bonds and stocks.
While liquidity in many Argentine assets is poor, hedge funds in Argentina typically have fewer assets under management than their Brazilian counterparts and are thus able to traffic in these less liquid assets. Sell-side research efforts focused on Argentina have also been cut back in recent years, as investment banks have reduced costs associated with a small market. This allows local funds to benefit from their in-country contacts, conduct in-depth research efforts not being done elsewhere, and often secure outsized returns as a result.
Local funds maintain and develop good relationships with senior management at locally domiciled companies. Given the size of the local market, access to CEOs and CFOs is often easier when compared to other countries in the region or in emerging markets. Furthermore, private equity investment opportunities can present themselves in industries such as real estate and agribusiness at very attractive valuations. Being located in Argentina allows local funds the ability to access these opportunities thanks to their web of contacts.
(Reprinted with permission from Alternative Latin Investor, www.alternativelatininvestor.com)
