There is an increasing uncertainty for hedge funds investing in traditional geographies due to the ongoing financial crisis, which has taken the steam out of many hedge fund returns in the last year or so. This current environment brings tremendous opportunities to other regions, especially in Latam, where infrastructure, regulation and products have been developing at a tremendous pace for the alternative investment industry.
Global institutional investors are grappling with decisions on where and when to invest in this crisis in an effort to amplify the returns, which have been only mediocre - or more often negative - in the recent past. It must therefore be noted G-7 hedge funds average returns have always been mediocre. In terms of risk-return, only top hedge funds have really been rewarding investors. The cause of this problem is related to the huge volume of money that institutional investors were pouring into hedge funds at a very quick pace. Managers were not able to digest these huge volumes. As for today, there are about 7,000 hedge funds and approximately 8,000 mutual funds, but only 6,000 companies on the NYSE, Nasdaq, and AMEX combined. It resembles a crowded market.
On the other hand, there are very good opportunities outside the traditional investment space. Latam hedge funds and equities are good examples. As for today, there about 120 off shore hedge funds focused on Latin America and there are 907 companies on the Merval (Argentina), Bovespa (Brazil), IPSA (Chile) and Mexbol (Mexico). It does not look like a crowded market. Moreover, now, it is not difficult to see a company, counting with reputable management and with earnings growth above 20%, trading at P/Es between 4 and 8. In the fixed income side, Brazil is an investment grade country with debt to GDP lower than some developed nations, stable inflation and still pays the highest real interest rate in the world.
Laws and norms have also been working well. Brazilian, Chilean and Mexican regulations are much stricter in terms of transparency, risk exposure, mark to market and NAV assessment than the offshore industry. Furthermore, there has been not a single case of fraud as regulators in the region require independent service providers and external risk assessment. Additionally, the Latam financial system is in a good shape. There was no event of recapitalization process made in a hurry, or Chapter 11.
The global hedge fund industry will suffer from investors' skepticism through the next years. Total assets under management and number of funds will continue to decrease in the coming months. On the other hand, those who survive well, showing staying power, respect to their mandates and decent return asymmetry, will gather assets from the ones who disappeared. Now Latam managers need to show their capabilities of pure alpha creation connected to such a good opportunity set, and are doing so with gusto.
As wealth managers, we plan to demonstrate our processes and portfolio construction robustness, taking advantage of the current situation to access funds which were hard closed in the past and to streamline our product line.
Although political risk still exists, Latam markets and alternative assets seem to be opportunities à la mode.
Otávio de Magalhães Coutinho Vieira, Director of Investments, Safdié Private Banking