Man Group, the world’s largest publicly listed hedge fund, is maintaining a bearish view on emerging market (EM) hard currency debt, warning that this year’s rally is built on shaky foundations as US inflation limits the Federal Reserve’s capacity to cut rates, according to a report by Bloomberg.

The rebound in EM bonds – up 27% since early 2023 and 8.5% year-to-date – has been fuelled largely by ETF flows and algorithmic strategies “lacking fundamental analysis,” according to Guillermo Osses, head of EM debt strategies at Man Group. He cautioned that as liquidity conditions tighten, these mechanical inflows could quickly reverse.

Man’s bearish positioning was a strong tailwind in 2022 but has since weighed on performance. Its flagship EM debt fund is down 1.8% this year, versus an average 7.9% gain for peers, according to Bloomberg data. Assets have declined to about $65m from a peak of $3.3bn in 2018.

With EM dollar bonds now trading at spreads near 2018 lows — just 286bps over Treasuries – Man Group argues that fundamentals will reassert themselves. “When easy money becomes less easy, the differences between good and bad borrowers tend to matter again,” Osses said.