Promeritum Investment Management, a hedge fund that has reaped over 30% returns from distressed emerging market (EM) dollar bonds, is shifting focus, with Co-Founder Paval Mamai believing that the trade has run its course after a two-year streak of gains, according to a report by Bloomberg.
The London-based firm fund is now pivoting towards local-currency EM target after its strategy of investing in defaulted bonds from Sri Lanka, Ghana, and Ukraine delivered returns of around 16% annually over the past two years, outperforming a Bloomberg index of EM debt hedge funds.
This success extended Promeritum’s track record of annual gains since its inception in 2015, with a 9% annualised return—three times that of the EM dollar debt index.
However, with debt restructurings across emerging markets reducing opportunities, Mamai believes the current distressed debt cycle is ending. “It’s unlikely we’ll see as many defaults or distressed situations unless there’s a major global shock,” he said.
While some funds continue to bet on long-defaulted bonds from Venezuela and Lebanon, Mamai considers these too speculative. Instead, Promeritum is turning to bonds denominated in local currencies, such as the Turkish lira and Nigerian naira, expecting them to benefit from falling inflation and upcoming interest-rate cuts.
This move may seem counter-intuitive given the impact of dollar strength on local EM markets since Donald Trump’s election win. However, Mamai argues that recent policy reforms—such as tighter monetary policies and capital control relaxations—are set to yield results, creating a favourable environment for local debt.
He sees the most promising opportunities in Turkey, Egypt, Kenya, and Nigeria as EM central banks enter a “monetary policy transition cycle.” Turkey is currently the fund’s largest position at nearly 15% of its holdings, with Kazakhstan also on its radar.
