The sharpest plunge in the Turkish lira in four years has soured one of the most lucrative carry trades in emerging markets – forcing multi-strategy hedge funds to unwind positions, according to a report by Bloomberg.
The carry trade in Turkey, a strategy where investors borrow in low-yielding currencies to invest in high-yielding assets, had delivered a 5% return this year before the crisis struck. But foreign funds were forced to dump positions when Turkish authorities detained Istanbul’s mayor, Ekrem Imamoglu, a key opposition figure, rattling market confidence.
As hedge funds rushed to exit though, some opportunistic investors, including Pavel Mamai, Co-Founder and Managing Partner at Promeritum Investment Management, saw the selloff as an opening.
“When the lira’s losses hit 10% yesterday, we thought this could be what we like to call the ‘pod moment,’” he said, referring to forced selling by hedge funds running multi-strategy pods.
Mamai, who manages $650m in emerging markets investments from London, took the opposite side of the trade – betting that the Turkish central bank would step in to stabilise the lira and keep interest rates high.
That bet proved correct with the Turkish central bank reacting aggressively by selling $8bn to slow the lira’s collapse and unexpectedly hiking the overnight lending rate by 200 basis points to 46% – a move aimed at restoring investor confidence.
Despite the central bank’s intervention, risks remain. HSBC Holdings and other banks have warned that further lira depreciation is possible, and the broader macro-political environment remains unstable under President Recep Tayyip Erdogan.
