By The Wall Street Journal
In a dark year for many hedge funds, Argentina is emerging as an unexpected bright spot.
For more than a year, a handful of firms piled into Argentine investments, hoping elections to replace President Cristina Fernández de Kirchner would usher in an economic turnaround. Few investors expected a huge, immediate payoff: Just last year, the South American nation defaulted on its debt amid a legal clash with hedge funds, including Paul Singer’s $27 billion Elliott Management Corp.
But on the heels of the strong showing in the Oct. 25 first-round presidential election by Buenos Aires’s business-friendly mayor, Mauricio Macri, firms such as Bienville Capital Management LLC, Brevan Howard Asset Management, Redwood Capital Management LLC and Perry Capital LLC are counting their winnings.
The funds have been betting on shares, bonds and the Argentine peso, in addition to more esoteric investments. Russell Abrams, a former hedge-fund manager in New York, for example, has purchased what he says is the largest fleet of taxis in Buenos Aires as a way to invest in the country.
“The first round of the elections, including the opposition's victory in the province of Buenos Aires, was a clear repudiation” of President Kirchner’s policies that will make it easier for any winning candidate to embrace market-oriented reforms, says Cullen Thompson, Bienville’s founder. “Better policy should lead to a better economy.”
Bienville placed early wagers on Argentina and had its Argentine-focused fund, now up to $300 million, soar about 33% last month, according to an investor. Brevan Howard’s Argentina fund, now about $530 million, jumped about 22% in October, according to people familiar with the firm run by Alan Howard. The Bienville fund now is up about 30% for the year, while the Brevan Howard fund gained 14% through October, the people say.
Jonathan Kolatch’s Redwood Capital was up about 10% in October in its Argentina fund and also posted gains in its flagship fund, where its Argentina trade makes up one of its largest positions, said a person familiar with the matter. Redwood holds some Argentine stocks but has more exposure to bonds and growth-linked securities known as GDP warrants.
The $12 billion Fir Tree Partners made about 20% on its Argentina position in October, thanks to GDP warrants and bonds, according to people familiar with the matter, contributing to gains for its flagship fund for the month.
Perry Capital LLC, whose Argentina position is one of the largest in its $9 billion flagship fund, also profited. Perry made about $60 million on the position, made up of exchange bonds and GDP warrants, in October, said a person familiar with the matter. Third Point LLC also benefited; Argentine government debt is the largest position in the firm’s credit portfolio, founder Daniel Loeb said in a conference call last week for his publicly traded reinsurance vehicle.
The gains come as emerging-market investments have rebounded sharply over the past month. Argentina’s Merval Index is up about 33% in peso terms since the end of September, while Argentine sovereign debt has climbed 8% in pesos, according to the Barclays Emerging Markets Argentina International Issue Index.
This year, several high-profile investments held by many hedge funds, such as Valeant Pharmaceuticals International Inc. and SunEdison Co., have run into problems, making the Argentine profits more valuable. Brevan Howard recently cut at least 10% of its workforce, illustrating funds’ difficulties. In a research note to clients dated Oct. 23, J.P. Morgan described this year as the worst for hedge funds since 2011.
The rallies began before the first round of Argentina’s election took place last month. Recent polls put Mr. Macri significantly ahead of rival Daniel Scioli, who has the endorsement of President Kirchner, in the Nov. 22 runoff election.
Hedge funds may face challenges extending their profits. A year or so ago, Argentine shares were very inexpensive, based on traditional valuation metrics, but they’re no longer as cheap. Just as important, it isn’t clear how much will change when a new president assumes power in December.
Argentina’s fiscal deficit will total 7.2% of GDP this year, according to a recent government estimate—the highest since 1982, when a military dictatorship was in power. The International Monetary Fund expects GDP to contract 0.7% next year, and economists say annual inflation is growing around 25%.
“The inheritance of bad policies, undermined basic institutions, widespread corrupt practices, mountains of past-due bills, frayed international relations, and a deeply divided electorate represent a veritable minefield for whoever takes over,” says Arturo C. Porzecanski, a professor of international economics at American University’s School of International Service. “Change will come no matter who wins, but it will occur in stages.”
Bienville is among those holding on to their Argentine holdings, saying a new president seems likely to engage in negotiations with the hedge funds that held bonds but didn’t consent to a restructuring after Argentina’s 2001 default.
The bulls say a settlement likely would give Argentina access to global capital markets again for the first time in more than a decade, leading to hopes for more gains as corporate profits rise and the nation gains a higher credit rating.
Mr. Thompson and other bulls say Argentina has been starved of capital under Mrs. Kirchner’s administration. Argentine assets accordingly represent a small slice of the portfolios of most global investors, something that will gradually change. One trader said he views Argentina as “one of the only growth stories in the world.”
Mrs. Kirchner has described the holdout hedge funds’ attempts to collect as akin to “extortion” and called some of the holdouts “vultures.” In contrast, Mr. Macri told the Financial Times soon after the election that while he wanted to be tough with hedge-fund creditors, he wanted to end the conflict.
“With Kirchner leaving office, there’s increased optimism about the country’s willingness to resolve outstanding liabilities,” says Gregg Hymowitz, managing partner of hedge-fund investor EnTrust Capital, which has money in several funds with exposure to Argentina.