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The Hedgeweek Interview: Unlocking value in Latin America: Ricardo Maxit, Copernico Capital Partners

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Ricardo Maxit outlines the central elements of Copernico’s strategies that focus on producing consistent returns from the Latin American markets.

HW: Wh

Ricardo Maxit outlines the central elements of Copernico’s strategies that focus on producing consistent returns from the Latin American markets.

HW: What is the background to CCP and its principals?

RM: Copernico Capital Partners (Bermuda) Ltd. (“Copernico”) is a performance-focused fund management company, managing USD 160 million for institutions such as fund of funds, private banks and family offices and high net worth individuals. The company was established by Mariano Caillet-Bois, Thomas Keesee and myself.

Copernico was founded in December 1998 as a Bermuda-based investment management company. The firm has done business under this name since its inception and is wholly owned by its three directors, all three having been shareholders since the firm’s inception.

We specialise in Latin American fixed income, equities and local currencies focusing on event driven and momentum strategies.

We have a team of 5 portfolio managers and Enrique Boilini, Principal of Yellow Jersey Capital, an investment advisory firm in Greenwich, Connecticut, is an advisor to the management company and a member of the Investment Committee.

HW: What are your key hedge fund products/strategies and when were these funds launched?

RM: We have two principal products: The Copernico Latin America Strategic Fund ,”CLAS”, (AUM USD 91 million) and the Copernico Argentina Fund, “CAF”,  (AUM USD 38 million), both offshore funds registered in the Cayman Islands.

The funds’ administrator is Bank of Butterfield International (Cayman) Ltd. and has been such for both funds since inception, August of 1999 for the CLAS and February 2003 for the CAF.

HW: What is your investment philosophy?

RM: Our philosophy is based on the continuous search for consistent, positive returns. While Latin American markets are known for their historic volatility, we believe that it is possible to produce consistent, positive returns by pursuing a three-pronged strategy. The three central elements of this strategy are:

1) an event driven, short to medium term gain component, where we focus on identifying and investing in relatively liquid securities, both debt and equity, that have an identifiable and relatively short term (1 month to 6 month) catalyst that will cause a repricing;
2) a momentum component, where, on an opportunistic basis, we seek to identify and take advantage of overbought and oversold conditions, which are typically very short term in nature (1 day to 1 month), focusing on extremely liquid securities, typically sovereign debt, currencies or tradable indices, to generate short term gains, and;
3) a current income component, where by investing in high coupon fixed income instruments with relatively short dated maturities and of relatively high credit quality, we can generate a base return for the portfolio without much volatility.

HW: How and where do you distribute your hedge funds?

RM: In the US and Europe we work with consultants and advisers with extensive experience in these markets.  The sales effort in Latin America is conducted directly by us.

HW: What is your current and targeted client base?

RM: Among our clients, there are a wide array of investors, including high net worth individuals, family offices, funds of funds, private banks, pension funds and insurance companies.

HW: How do you generate ideas for your funds?

RM: One of the edges that we believe we have is our extensive network of contacts and counter-parties throughout the region, which has been put together over 20 years by the members of our investment team. Our portfolio managers are continuously in contact with those persons and institutions we consider among the smartest in practically every Latin American country. It is a two-way flow that in general has helped us generate good results for the Copernico funds.

While this network is, of course, important for generating investment ideas, what is more important is the in-house idea generation and due diligence process, which is primarily  the result of our extensive research effort.

HW: What is your approach to managing risk?

RM: The two main risk control techniques that we use are 1) portfolio diversification, 2) value at risk modelling, and 3) an adherence to tight stop loss rules.  The portfolio is diversified at a number of levels with countries, sectors, and asset types acting as the starting points in the process. Respecting those limits and analyzing the correlation among the different investments is the next step. The risks we take are essentially event risk and market risk. All the fund’s assets are subject to market volatility and liquidity. We also have completion risk with respect to our event driven positions (i.e., that the events which we are targeting as a catalyst for re-pricing fail to occur).

The risks are monitored jointly by the two managing partners in Buenos Aires, namely Mariano Caillet-Bois and myself. Risks are monitored through a combination of ex-ante and ex-post measures. The ex-ante measures include the value at risk model mentioned above, duration and the running of different market scenarios. The ex-post measures, include Sharpe ratio and tracking error, which help us evaluate how the fund is performing on a risk adjusted basis.

HW: What is the performance/track record of your funds? How will this change going forward?

RM: The performance of the CLAS fund is summarized below:

LTM   3 years Since inception 
Return (Annualized)    21.89% 14.59% 12.36%
Volatility (Standard deviation)   3.71%  5.60%    7.95%
With more than 5 years of track record, CLAS has a net annualized return of over 12% with an annualized volatility under 8%, 82% of the months were positives, and a Sharpe ratio over 1.15. The fund was up 2.23% in September and is now 14% YTD (32% in 2003).

The CAF fund has 35% net return annualized since inception (Feb 03), a Sharpe ratio of 5.5, 100% of positive months and an annualized volatility close to 6%. The fund was up 2.7% in September and is up 19% YTD (39% in 2003)

We expect that our annual target returns, 12%-15% for the CLAS, and 15%-20% for the CAF are achievable again next year as we consider that our approach to Latin America remains the best way to generate consistent returns

HW: What sectors are you looking at right now?

RM: Main focal points remain distressed securities, restructuring stories and those ever present investment situations where a catalyst will unlock value.

HW: What do you expect to see in the year ahead?

RM: For next year, we remain constructive on the fundamentals in the region. We believe liquidity is likely to remain the key driver, but having said this, our concern regarding the interest rate scenario is increasing.

HW: How will these changes/future events impact on your own portfolios?

RM: While our main concern is higher interest rates, we have been properly hedged for such scenario for most of this year, and we expect to remain so in 2005. However, and because of the nature of most of our investments, we will have to actively monitor how this interest protection is faring.

HW: What differentiates you from other managers in your sector?

RM: We are based in the region, so we tend to see opportunities before most other market participants do, and we believe that we tend to understand them better.

There are very few truly event driven managers focused on Latin America, so we are in a relatively uncrowded sector.

Most of other investors in the region are long only benchmark investors, so they tend to be victims of the region’s volatility, rather than knowing how to exploit it to their advantage. Since we are total return investors, we are often in the position to efficiently take advantage of the opportunities brought up by volatility.

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