The Local Edge

JULY, 2009

 

In the real estate world the mantra is “position, position, position”. The same may be said for hedge funds based in Latin America. Proximity to the real action gives local managers an advantage over funds managed at a distance. We would not have said this in the mid-1990s when Latin America was an intense focus of investor interest in major financial centers and there was a proliferation of emerging markets mutual funds. It was perceived that the best perspective was achieved from a distance (on high?) looking towards the region from the northern hemisphere where one could observe matters without all the baggage that local investors and naysayers brought to the process.History ultimately came along to mug this school of thought, firstly in the mid-1990’s Tequila Crisis and then later on with the traumas of the globalised emerging market crisis of 1998 (ironically triggered elsewhere in Thailand and Russia) and then with the Argentina crisis of late 2001. The people on the ground had been right and those “at a distance” had been caught wrong-footed. It was out of these debacles that the local hedge fund industry arose paralleling the rest of the world in what came to be known as the Decade of the Hedge Fund.

One can get too glib though on this subject for in reality the Latin “Decade of the Hedge Fund” was really more like half a decade (2003-2008) and it was overwhelmingly Brazil with little more than a token sprouting of hedge fund structures in other countries in the region. Nevertheless it can still be said that non-local LatAm hedge funds were almost as scarce. This is surprising for if there one industry that likes jumping on a bandwagon it is the hedge fund industry. Largely the outside players stayed away form region specific funds and the dabbling in the larger markets of the continent was by the very largest momentum funds from Greenwich who shoveled money in and out of Brazil and Mexico powered by the yen-carry trade. As we all know that practice came to grief in late-2008. Being closer to the action may have saved the locally based funds from annihilation as they were smaller and could trade more nimbly but still when the elevator cable is cut, all those in the elevator go down.

So the storm has now largely past and the questions arise as to whether the locally based funds will recover, whether they will retain their advantage over non-locally managed funds and how they might do this.

For us the main advantages that locally based funds have are: