| In the real estate world the mantra is | | | | all the local sources at their disposal and, for |
| “position, position, position.” The same | | | | better or worse, knew the real story of the |
| may be said for hedge funds based in Latin | | | | political world and were cognizant of the latest |
| America. Proximity to the real action gives local | | | | corruption scandal or its perpetrators. |
| managers an advantage over funds managed at a | | | | This closeness to the action also meant that they |
| distance. We would not have said this in the | | | | were privy to the up and coming stories whereas |
| mid-1990s when Latin America was an intense | | | | those dependent upon Street research were |
| focus of investor interest in major financial | | | | usually only getting into nascent go-go stories |
| centers and there was a proliferation of emerging | | | | after they had “got up and gone”. The |
| markets mutual funds. It was perceived that the | | | | boom in Brazilian REITs in 2007 was a particularly |
| best perspective was achieved from a distance | | | | poignant example as was the very poor quality |
| (on high?) looking towards the region from the | | | | MercadoLibre that was dished up as an Argentine |
| northern hemisphere where one could observe | | | | ADR and later plunged in value when its true value |
| matters without all the baggage that local | | | | was divined by the marketplace. Likewise the |
| investors and naysayers brought to the process. | | | | Grupo Clarin listing in London promptly went over |
| History ultimately came along to mug this school | | | | a cliff when it was realized that it was on the |
| of thought, firstly in the mid-1990’s Tequila | | | | wrong side of the government of the day in |
| Crisis and then later on with the traumas of the | | | | Argentina. If anything ADR trading by local hedge |
| globalised emerging market crisis of 1998 (ironically | | | | funds was a means of trading against the foreign |
| triggered elsewhere in Thailand and Russia) and | | | | tendency, a variation on “taking candy from |
| then with the Argentina crisis of late 2001. The | | | | babies”. The foreign investors were obsessed |
| people on the ground had been right and those | | | | by their liquidity and jurisdiction mantras and clung |
| “at a distance” had been caught | | | | to their ADR ciphers even when they were one |
| wrong-footed. It was out of these debacles that | | | | of the worst ways of accessing the real |
| the local hedge fund industry arose paralleling the | | | | economy in the markets they professed to be |
| rest of the world in what came to be known as | | | | interested in. |
| the Decade of the Hedge Fund. | | | | If we need a reason for the spectacular success |
| One can get too glib though on this subject for in | | | | of the hedge fund model in the LatAm markets |
| reality the Latin “Decade of the Hedge | | | | where they have sprung up we need look no |
| Fund” was really more like half a decade | | | | further than their “tax efficiency” for local |
| (2003-2008) and it was overwhelmingly Brazil with | | | | HNWs. Hiding funds from the government has |
| little more than a token sprouting of hedge fund | | | | made LatAm economies what they are today. |
| structures in other countries in the region. | | | | Light-fingered governments have been countered |
| Nevertheless it can still be said that non-local | | | | by the tight-fisted wealthy. Hedge funds have |
| LatAm hedge funds were almost as scarce. This | | | | become the latest tool in this battle. It is possibly |
| is surprising for if there one industry that likes | | | | that Mexico and Argentina have the most history |
| jumping on a bandwagon it is the hedge fund | | | | at hiding the wealth of the HNWs that hedge |
| industry. Largely the outside players stayed away | | | | funds have not taken off there in their onshore |
| form region specific funds and the dabbling in the | | | | version. In Brazil though a combination of some |
| larger markets of the continent was by the very | | | | savvy regulation and a certain realism in dealing |
| largest momentum funds from Greenwich who | | | | with the problem of evasion meant that it was |
| shoveled money in and out of Brazil and Mexico | | | | better for the Brazilian economy to have local |
| powered by the yen-carry trade. As we all know | | | | money stashed in local hedge funds than having it |
| that practice came to grief in late-2008. Being | | | | whisked away to Switzerland to be recycled into |
| closer to the action may have saved the locally | | | | Madoff-style investment scams. |
| based funds from annihilation as they were | | | | Likewise the latest crackdown on offshore |
| smaller and could trade more nimbly but still when | | | | havens by Western governments makes life |
| the elevator cable is cut, all those in the elevator | | | | somewhat tougher for LatAm HNWs who live in |
| go down. | | | | fear of having their assets exposed to public view |
| So the storm has now largely past and the | | | | even if they are not avoiding the taxes of the |
| questions arise as to whether the locally based | | | | jurisdictions that are conducting these witch hunts. |
| funds will recover, whether they will retain their | | | | Onshore solutions (read home-grown hedge fund |
| advantage over non-locally managed funds and | | | | industries) for the tens of billions of flight capital |
| how they might do this. | | | | would mobilize capital for domestic advancement |
| For us the main advantages that locally based | | | | (and infrastructure) much the same as has |
| funds have are: | | | | occurred in Asia. |
| · Closer to the political and economic action | | | | The hedge fund industry around the world has |
| intelligence | | | | only had a few windows of connection between |
| · Able to play in smaller or less visible | | | | the savings pools of the masses and that of the |
| names | | | | hedge funds. Primarily this has been the |
| · Able to tailor their structures to the tax | | | | participation of public employee retirement |
| “needs” of their local clientele | | | | schemes in allocating a rising percentage of AUM |
| · Better able to avoid the tax dragnet now | | | | to “alternative investment” categories. |
| being swept by the US and Europe through | | | | LatAm is way behind on this score. In Mexico the |
| offshore havens | | | | public equities market has been held back by the |
| · Better poised to tap the rising tide of local | | | | failure to even approve equity investments for |
| savings in the region | | | | pension funds, let alone anything so exotic as a |
| · Curiously, they have been relatively | | | | hedge fund. However, if locally based hedge funds |
| scandal-free, thus far, in an industry which has | | | | were empowered to collect investments from |
| had more than its share of traumas in recent | | | | individuals who were not HNWs or from pension |
| years | | | | funds then there could be an exponential |
| We shall address some of these advantages. | | | | democratization of the hedge fund industry in the |
| Firstly it undeniable that the local managers are | | | | region. |
| closer to the action and have better intelligence | | | | Finally, legislation to create and supervise hedge |
| sources. It has now been 18 years since Wall | | | | funds in the region has been relatively light-touch |
| Street “discovered” LatAm and if | | | | thus far. Brazil again has the best legislation and |
| anything the learning curve appears to be more | | | | should serve as a model for the rest of the |
| of a parabola than anything else. In 1991 it was | | | | region. As usual though ridiculous nationalist pride |
| exotic and unknown with bets being placed upon | | | | considerations have held back others from |
| hunches (and some filtered local gossip). By the | | | | following this lead. As a result the others have |
| mid-1990s there was intense study of the region | | | | been retarded in their growth in this category and |
| as everyone piled into the analytical game. By | | | | have missed out on developing the skillsets that |
| 1998 this wave had passed and the interest since | | | | come from having a nascent industry and from |
| then has been cherry-picking of stories that | | | | the retained (dare we say “trapped”) |
| provide some excitement. This led to a situation | | | | investment funds that can be mobilized from the |
| where the distant observer could not see the | | | | general evolution of local capital markets. |
| wood for the trees. The debacle of 2008 showed | | | | Thus in conclusion we would posit that |
| that the momentum players from afar did not | | | | locally-based hedge funds have a “smarts” |
| know what they were doing, particularly in Mexico | | | | advantage over the foreign based funds. Certainly |
| and Brazil. This was a “faith-based” | | | | they don’t have the ability to mobilize the |
| investment style. The local funds may have | | | | type of money that Greenwich can, but then |
| played the same stock stories but generally knew | | | | again the region does not need brainless money |
| the dangers, gossip and flaws or a particular | | | | flooding in and out in tsunami tides as we saw in |
| corporate name and steeled themselves to dive | | | | Brazil and Mexico in 2007 and the first part of |
| overboard. This was a game of chicken in which | | | | 2008. Like any tsunami they do more damage |
| they hoped that their nimbleness would help them | | | | than good. Governments can harvest the industry |
| escape before the bigger momentum funds even | | | | for good or dissipate themselves in struggling |
| knew there was a problem. The locals also rarely | | | | against the sheer Darwinian destiny of hedge |
| read the baby food served up by the foreign | | | | funds. It is probably better to join them than fight |
| correspondents in the region as news. They had | | | | them. |