- Country exposure at about 70%, mainly GDP-linked securities
- Nirav Shah's fund gained 39% last year, 3.1% in January
Ping Capital Management’s global macro fund bet the farm on Argentina.
The Ping Exceptional Value Fund built a stake in the country, mostly with so-called GDP-linked warrants, that would grow to about a 70 percent exposure by 2011. The fund gained 3.1 percent in January, extending a 39 percent surge last year, making it the best performer in Bloomberg’s global ranking of hedge funds with $250 million to $1 billion in assets.
The fund made the concentrated bet in one of South America’s most beleaguered economies, then run by free-spending President Cristina Fernandez de Kirchner, whose standoff with hold-out creditors cut off the country from debt markets. After the fund posted gains of more than 100 percent as well as double-digit losses over the years, portfolio manager Nirav Shah is sticking with the Argentina bet in 2016 as the prospects for its economy improve.
"Argentina is still very undervalued. It’s still mispriced," said Shah, a former vice president of proprietary trading at Lehman Brothers Holdings Inc., where he focused on Latin America. "It has just recovered the ground it had lost in 2014. And that was sufficient for us to really deliver some outsize returns" in 2015.
The warrants were first issued in 2005 as a sweetener to boost creditor participation in the nation’s debt restructuring four years after Argentina’s record $95 billion default.
The fund’s bet on the euro- and peso-denominated GDP-linked warrants pays off if economic growth hits a target. Investors receive a coupon payment if growth in the previous year exceeds a threshold and the inflation-adjusted value of the country’s GDP is above a base-case scenario. Since last year, and until the warrants mature in 2035, the threshold is 3 percent.
Ping Jiang, a former SAC Capital Advisors emerging-markets portfolio manager, founded the company and serves as its chief investment officer. The firm has invested in Argentina since it started in 2008.
In the aftermath of the global financial crisis, the Ping fund bought assets cheaply before prices for Argentina’s agricultural exports picked up. It gained 193 percent in 2009 and 105 percent the following year, according to a letter to investors obtained by Bloomberg.
The boom years for the economy and the fund wouldn’t last. Fernandez’s policies choked off economic activity and business sentiment. Since 2012, growth has consistently fallen short of the threshold for the warrants, and the currency has plunged 71 percent, hurting peso-denominated investments. In 2014, the peso warrants plunged 63 percent in dollar terms, according to Buenos Aires Stock Exchange prices. Shah’s fund fell about 29 percent.
The fund bounced back in 2015 as investors became more optimistic over the prospects of Argentina electing a more market-friendly president and an end to the standoff with bondholders stemming from its 2001 default. While growth faltered, the price of the warrants rallied. The fund’s strong performance also came from trading around Venezuela’s default concerns and arbitraging the difference between yields on the nation’s sovereign and quasi-sovereign debt.
After President Mauricio Macri took office in December, the new Argentine government eliminated farm export taxes, let the peso float freely, and pledged to overhaul Argentina’s statistics institute, which has been criticized for manipulating government data. Once Macri settles with litigating bondholders, foreign investment will flow into the country, a boon for economic growth, said Shah, who worked with Ping at SAC. He expects the economy to exceed the 3 percent threshold in 2017.
Bank of America Corp. strategists said on Feb. 10 that they expect GDP warrants to continue to rally in 2016 if a holdout agreement is reached and economic activity rebounds as expected in the second half of the year.
Shah said his fund has benefited over time from a stigma against Argentina, which has begun to fade with Macri’s leadership.
"I think that’s one of the key reasons why the assets were underpriced in the first place," said Shah, who expects the GDP-linked warrants to double or triple in value over the next four to six years.
Bloomberg’s rankings of the top-performing hedge funds are based on funds’ net returns for 2015. Because hedge-fund returns can be difficult to obtain, our lists are not all-inclusive. In addition, some of the numbers were difficult to verify. Unless the information came from Bloomberg data or the hedge-fund firm itself, we tried to verify it with other sources, including investors and other fund databases. All returns are for full-year 2015; fund assets are the latest available. Onshore and offshore assets were combined for a number of funds, while figures for other funds were only for the larger or better-performing class of the fund.