London-based emerging markets-focused macro hedge fund Broad Reach Investment Management is putting the entirety of its cash allocation for frontier markets into recovery stories in Egypt, Nigeria and Pakistan, according to a report by Bloomberg.
The Broad Reach fund anticipates that devaluations, interest-rate hikes, and external loans will reduce currency volatility in those specific countries. Secondly, the fund believes that high coupon rates will compensate for any potential declines in bond prices.
This approach marks a departure from the fund’s previous tactics, which yielded a 14% return in 2023 through its long-short positions in credit and rates across emerging markets, compared with a 9% gain on the Bloomberg emerging-market debt hedge fund index. Broad Reach has returned 16% on average since 2019.
For Q1 2024, the fund achieved a 12% gain.
The report quotes Bradley Wickens, Founder, CIO and CEO of the $1.5bn hedge fund in referring to the three countries, each of which traded as distressed credit until recently: “We’ve been waiting for these as opportunities for over 12 months.
“You should be as big in those trades as you feel comfortable to be.”
Wickens added that he saw a two-year opportunity in this strategy with the potential for nominal appreciation on top of coupon returns of up to 28%, while support from the International Monetary Fund would likely make currencies stronger and less volatile, in turn attracting more hot money flows from other investors.
According to the report, the Broad Reach fund has currently allocated 50% of its frontier investment to Egyptian credit, 30% to Nigeria and 20% to Pakistan.
Wickens added that the flexibility afforded by emerging markets — where fewer hedge funds operate, compared with core markets — was an advantage, and that his biggest shorts were in Asian foreign exchange, where falling rates are combining with declining growth and inflation.
