How a few Argentina-focused hedge funds escaped the pain
When asset prices are tumbling and some big investors are suffering billions of dollars of losses, just getting away without losing your shirt can be classed as a win.
Following Argentina’s debt crisis, sparked by President Mauricio Macri’s shock primary election defeat last month at the hands of his Peronist opponent, plenty of losers are emerging but few winners are to be found.
The high cost of borrowing stocks to short, or of betting against the currency, has meant few funds placed meaningful bets against Argentina, but some escaped the worst.
Light Sky Macro — run by Brevan Howard alumnus Ben Melkman — pared back its exposure to Argentina before the trouble started, limiting its losses, according to a person familiar with positioning.
A number of investors bought credit default swaps, a form of insurance against a bond defaulting, before the poll on August 12, to protect their positions in Argentine bonds. That helped them sidestep the turmoil that saw some specialist emerging-market managers endure billions of dollars of paper losses.
Alberto Gallo, head of macro strategies at Algebris Investments, a $12bn-in-assets hedge fund based in London, said he started hedging his macro credit fund’s exposure to Argentina in 2018, and became more bearish in June. At the end of that month, its Argentina position was 98 per cent hedged through CDS, according to public filings, up from just 3 per cent last December.
Algebris bought bonds with long maturities and CDS on the shorter-dated debt. “The two markets were pricing a different probability of default,” said Mr Gallo.
The upfront cost of buying CDS to protect against default on Argentine bonds jumped from 18 per cent to 48 per cent on August 13, according to data from Markit. That equates to a cost of $4.8m to protect $10m of debt. At the beginning of September, pricing on CDS increased to 62 per cent.
The surprise drubbing for Mr Macri scuppered positive bets on Argentina. The price of the country’s dollar bond maturing in 2021 as much as halved immediately after, while the peso has lost more than a fifth of its value against the dollar since the poll.
Given that four-fifths of Argentina’s debt is denominated in foreign currency, the peso’s dramatic depreciation badly damaged the government’s hopes of repaying its debts on time. Mr Macri announced a plan to delay payment on $101bn of debts.
According to Jason Kaplan at hedge fund NWI Management, who bet heavily ahead of the election that CDS prices would spiral higher, the situation remains “really volatile”.
“There are people that are under the impression that the IMF will bail them out and that is where we differ,” he said, arguing the fund is unlikely to throw its full support behind a populist government after agreeing a $56bn bailout programme just last year.
Additional reporting by Joe Rennison in New York