Investors who traditionally were shy about viewing Latin American investments as much more than an opportunistic play is taking a second look. Latin American hedge funds have progressively moved to the long-term side of international institutional and high net worth individuals' portfolios thanks to a more stable economic backdrop and a new cast of managers with access to a broader array of tools. For those who know how to make the most of these and future changes, plenty of opportunities exist.
Signs of economic stabilisation are everywhere. Economic analysts signal stronger macroeconomic fundamentals as the foundations for a strong recovery following the Brazilian crisis in 1998 and the Argentine in 2001-2002. Fiscal and monetary discipline translated into increases in central banks' reserves and decreases in fiscal budgets. On the private sector side, an important de-leveraging process has taken place over the last three years, courtesy of debt refinancing at favourable conditions and increases in exports led by commodities, to the fast growing economies of India and China. These risk-lowering factors attract investors to a growing number of locallybased managers.
These locally-based managers themselves represent a new breed of market leaders. In the past, the Latin American investment industry typically was dominated by long only international players, but the region has seen a growth in local independent management groups who increasingly are challenging the supremacy of the international financial institutions. The new guard is using new investment instruments and the deeper markets for hedging tools to construct more efficient portfolios with tighter risk management policies.
Although each country has its own characteristics, it's fair to say that with the increase in the sophistication and quantity of locally-based managers, we are seeing an increase in the number of strategies: from multi-strategy and global macro, to event driven and special situation; from long/short equities to fixed income arbitrage.
Independent of these market-driven improvements, emerging markets and hence Latin America have garnered more attention as international investors increasingly have a difficult time producing high performance in their core investments.
Of course risks exist. Geographical concentration and long net exposures remain a concern. In a region with a natural long bias and high country focus, only a small group of managers operate on a pan-Latin American level and with low net exposure. On the political front, although democracy is well established in most of the countries in the region, parliamentary and presidential elections in eight countries over the next twelve months will be a source of volatility. Other major factors that affect the economic stability come from outside the region, namely sustained increase in US interest rates, a decrease in commodity prices, or a major international credit event.
With the EMBI Latam spread at its all time low and the MSCI Latam at 1800, the volatility will be welcomed. After all, producing performance in any type of market is what it's all about.