(Bloomberg) — Broad Reach Investment Management, a London-based emerging-markets macro hedge fund, is beating peers by putting all of its cash allocation for frontier markets into recovery stories in Egypt, Nigeria and Pakistan.
The fund is betting that devaluations, interest-rate hikes and external loans will curb currency volatility in those countries and that high coupon rates will compensate for any declines in bond prices. It’s a new strategy for Broad Reach, which made 14% last year with its long-short positions in credit and rates across emerging markets. In the first quarter, the fund is up 12%.
“We’ve been waiting for these as opportunities for over 12 months,” Bradley Wickens, London-based founder, chief investment officer and chief executive officer of the $1.5 billion hedge fund, referring to the three countries, each of which traded as a distressed credit until recently. “You should be as big in those trades as you feel comfortable to be.”
Wickens says he sees a two-year opportunity in this strategy with the potential for nominal appreciation on top of coupon returns of up to 28%. He said support from the International Monetary Fund would likely make currencies stronger and less volatile, and in turn attract more hot money flows from other investors.
The fund currently has 50% of its frontier allocation in Egyptian credit, with Nigeria and Pakistan following with shares of 30% and 20%, respectively. Here’s what Wickens had to say about each of them:
EGYPT
“You’ve unquestionably got a very devalued currency, which is available in size. Importantly, there is liquidity to trade the currency and the T-bills in relatively large size. We just had this huge rise in available reserves as a function of the UAE, IMF and European money. It is right here, right now as a trade and the icing on the cake. One would expect management of the Egyptian pound going forward. There will be a bit of volatility, but it will be managed volatility and they’ve got the firepower now to manage it. The nice thing about one year T-bills is the central bank pays you back in a year and liquidity is just not an issue.”
NIGERIA
“The returns are potentially higher but the volatility will be greater, the liquidity will be less than in Egypt, but nonetheless it is a very attractive trade as well. There’s a forward-looking catalyst: if I was managing the debt management office in Nigeria, I would be issuing a two-to-three billion-Euro bond. In addition, there is up to $2.5 billion from the World Bank pending. That would be a forward-looking positive catalyst because I think the greatest concern in Nigeria is that there is still pent-up domestic demand for dollars.”
PAKISTAN
“This trade is more like a six- to nine-month trade. We expect that over the next few months, you’re going to see an IMF deal and in the presence of an IMF deal, you are going to see continued currency stability. And during that period of continued currency stability, you have a reserve buffer now that allows them to manage that currency stability and you are going to be able to achieve returns somewhat in the twenties. Not quite as good as Egypt, not quite as good as Nigeria, but very solid.”
Broad Reach has returned 16% on average since 2019 and made 14% last year, compared with a 9% gain on the Bloomberg emerging-market debt hedge fund index.
Hedge funds overall had mixed results in 2023. While Said Haidar lost a record 43% as his Haidar Jupiter fund’s leveraged bond market bets imploded, Rob Citrone’s hedge fund, Discovery, surged 48%, with gains largely driven by long bets on equities and sovereign bonds in Latin America, US credit, and long-short wagers on financial stocks.
Wickens sees the flexibility to take positions in emerging markets, where fewer hedge funds operate compared with core markets, as an advantage. He says his biggest shorts are in Asian foreign exchange, where falling rates are combining with declining growth and inflation.
©2024 Bloomberg L.P.
