An ear to the ground in Latin America
The Santander group has a long history serving the Latin American markets, with the bank a market leader in countries throughout the region. The Optimal Latin America Fund, launched a year ago by Optimal Investment Services, the group's Geneva-based fund of hedge funds management business, therefore draws on long-established expertise within the group.
Optimal was born within Santander Private Banking in 1989 to guide clients' investments in hedge funds, but six years later the firm started developing its own funds of hedge funds and in 2001 it was spun out of the private banking division as an autonomous business offering its services to clients outside the Santander group. Today Optimal manages some USD10bn in assets in single-strategy funds of hedge funds, multistrategy funds and managed accounts.
Optimal's philosophy is to seek equity-like returns accompanied by bond-like volatility and very limited downside. While historically this approach has been difficult to apply in emerging markets, it made sense in Latin America where the group's expertise is well established and where the combination of economic growth, market inefficiencies and strong capital formation offers a wealth of opportunities for hedge fund managers.
The impetus for the Latin America Fund came from European and Asian institutions anxious to draw upon the group's expertise to access a market that has shaken off past instability to become one of the most stellar economic performers of the 21st century.
This appetite has extended to Santander's private banking client base in Latin America, a segment where initially Optimal did not market the fund. Ironically, local investors that once preferred diversification outside their home region rather than additional Latin American exposure are using the fund to reduce directionality in their portfolios.
Across the region there are perhaps 50 managers that meet Optimal's criteria in areas such as pedigree, infrastructure, size of assets and downside volatility characteristics. Portfolio construction takes account of strategy constraints including capacity and concentration risk - especially for managers and investments outside the dominant market of Brazil. The fund invests in relative value, global macro and equity long/short managers.
Manager selection is made easier by Santander's long history across the region and its network of partnerships within it, which provide a vital ear to the ground. Hedge fund managers in Latin America belong to a close-knit community, and Optimal can gain insight into their character and background through local contacts, and from counterparties who do business with them on Santander's trading desks in New York and Brazil.
Currently around 80 per cent of the managers with which the fund invests and a similar proportion of its assets are in Brazil, inevitable given the longer track records offered by the country's managers. Their experience a decade ago of huge current account deficits, regular devaluations and inflation approaching 100 per cent has created a breed of managers who focus on absolute returns in hard currencies.
The Optimal fund invests with managers such as Hedging-Griffo, in which Credit Suisse has taken a 50 per cent stake, and Gávea Investimentos, the firm established by former central bank president Arminio Fraga, a former colleague of George Soros - nimble operators that are very experienced in extreme market conditions, that are used to restrictive regulations like daily NAVs, and are capable of delivering performance without compromising their risk profile.
Balkir Zihnali, senior vice-president, and Luis Javier Echave, vice-president, are managers of the Optimal Latin America Fund based in New York
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