Falling U.S. bond yields and a weakening dollar are helping emerging market-focused hedge funds recover, after some managers, including Pharo Management, $ 12 billion in assets, struggled after a start in difficult year.

Emerging market funds gained 1.9% last month, according to data group Eurekahedge, ahead of a gain of 1.1% among hedge funds in general. That leaves them up 5.4% this year, still behind average hedge fund earnings of almost 8%.

Emerging market managers benefited from a recent drop in US Treasury yields, which soared earlier this year as the easing of coronavirus lockdown restrictions raised investor expectations for a strong economic recovery in the United States and rising inflation.

The 10-year Treasury yield rose from 0.9% at the start of the year to over 1.7% at the end of March as prices fell. However, it has since fallen back below 1.5%, partly as a result of rising US-Chinese tensions.

Investors often pull out of emerging markets when US growth picks up and Treasuries yields become more attractive, but they tend to hand over money when US bond yields fall. The weaker dollar over the past two months has also helped drive down emerging market debt service costs, as much of their debt is denominated in greenbacks.

Line chart of US 10-year bonds, percentage return showing US Treasuries rallying

London-based Pharo, headed by former Merrill Lynch banker Guillaume Fonkenell and one of the world’s largest emerging market hedge funds, was hit hard in the first quarter.

Its $ 5.6 billion Gaia and $ 5.3 billion Macro funds, both of which had made money in each of the past five years, were down almost 9% and 7% respectively. at the end of March, according to figures sent to investors, while his fund was down about 11.5 percent. The company had been bullish in emerging markets and some longer-term emerging market bonds, said a person familiar with its positioning.

However, it has reduced some of its losses over the past two months, taking advantage of more favorable conditions for emerging markets. Its Gaia fund is now down 6.3% this year at the end of May, according to people who had seen the numbers. Its Macro fund is down 4.7%, while its smaller Trading fund is down 7%, people said.

“The past year has been tough for fund managers” in emerging markets, said Peter Sleep, senior portfolio manager at Seven Investment Management.

Pharo declined to comment on what drove the performance.

Other funds that have recently gained include London-based Carrhae Capital, which rose 2.7% in its hedge fund and 4.5% in its long fund last month, according to figures sent to investors. The hedge fund gained 2.1 percent for the year, while the long fund gained 9.6 percent.

Ali Akay, chief investment officer of Carrhae and a former partner of hedge fund SAC, said rising US bond yields pushed emerging market investors from growth stocks to value stocks, which had benefited some of his investors. positions.

laurence.fletcher@ft.com



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