Hedge funds focused on emerging-market (EM) debt are increasingly adopting risk-mitigation strategies to protect strong gains, as a historic rally in developing-nation bonds coincides with mounting global uncertainty, according to a report by Bloomberg.
EM debt hedge funds have delivered nearly 13% returns year-to-date, outperforming peers across other asset classes, according to Bloomberg index data. Yet with spreads over US Treasuries at their tightest levels in 15 years, managers are rebalancing portfolios to defend profits against the backdrop of tariff tensions, unpredictable US policy, and persistent geopolitical conflict.
To reduce risk, funds are shifting from longer-dated, lower-rated bonds to shorter-duration, higher-grade, and more liquid instruments, while holding larger cash positions. BlueBay Asset Management’s $784m Emerging Market Unconstrained Bond Fund, up 17% over the past year, is one of several funds emphasising dry powder and flexibility in today’s uncertain environment.
The EM debt rally has been fuelled by $31bn in inflows so far in 2025, with investor appetite supported by a softer US dollar and heightened interest in alternative assets. In the week ending 23 July alone, $5.7bn flowed into EM bonds — a near-record weekly haul.
Yet risks remain. The potential for a new Iran-Israel flare-up, escalating US tariffs, and a shift in global growth sentiment are top concerns. Blue Diagonal’s EM Fixed Income Fund, led by CIO Demetris Efstathiou, has responded by concentrating on AAA- and AA-rated sovereigns, with exposure to resilient domestic markets like Brazil, Mexico, and Turkey.
At Enko Capital, manager Alain Nkontchou is taking a similarly cautious stance. His Africa-focused Enko Africa Debt Fund, which returned 24% in the past year, noted that current pricing assumes a near-perfect “Goldilocks” scenario — fading recession risks and anticipated rate cuts — leaving little room for downside surprises.
Meanwhile, ProMeritum Investment Management, a $700m EM specialist, believes that liquidity management will be crucial in the second half of the year.
“Liquidity management will be critical in the second half of the year because of an unpredictable environment and geopolitical risks,” said Evgueni Konovalenko, managing partner at the firm.
