Carlyle’s ESG Hedge Fund Slams Yellen as 2014 Losses DeepenMeghan Morris and Kelly Bit
For Kevin Kenny and Mete Tuncel, co-founders of $5.5 billion investment firm Emerging Sovereign Group LLC, central banks are inflating markets through policies that will end in pain. Until then, investors in one of its macro funds are paying the price.
The Emerging Sovereign Group Credit Macro Event Master Fund tumbled 4.8 percent in June, its fifth straight monthly decline, and is down 17 percent in 2014, according to a letter obtained by Bloomberg News. That followed an 18 percent drop in 2013.
The firm, originally seeded by Julian Robertson’s Tiger Management LLC and owned by Carlyle Group LP, lost money in the $170.9 million strategy after credit markets rallied globally, according to the letter. The cost to protect emerging market sovereign debt from default declined this month to the lowest level in more than a year; Ecuador, whose socialist president forced a default in 2008, sold $2 billion of bonds and Iraqi debt prices held even as the country descended into civil war.
“Despite disappointing global growth, risky assets continue to rally,” Kenny, the firm’s chief investment officer, and Tuncel, a money manager, said in the letter. “The mispricing of risk in financial markets has become even more extreme and widespread, measured both geographically and by asset class, than before the global financial crisis.”
Randall Whitestone, a spokesman for Washington-based Carlyle, declined to comment. Carlyle agreed to purchase a 55 percent stake in ESG in June 2011. ESG has a range of funds betting on fixed income, equity, credit, currency and commodity markets globally, with a focus on emerging markets.
The Credit Macro Event Master Fund was started in 2008 to bet against emerging market debt. It later expanded to include the developed world and in June lost money on Russia and Australia. The strategy initiated a bet against Chile using five-year credit default swaps as it anticipates the country will be vulnerable as China’s economy slows, according to the letter. It also took a small position wagering on Greek bonds.
ESG criticized Federal Reserve Chair Janet Yellen for saying on July 2 that the main line of defense against turmoil should include regulatory pressure, attention to bank capital and multiagency oversight -- or a macroprudential approach -- rather than monetary policy. They said she asserted that asset bubbles are entirely the result of irrational markets and not caused by Fed action.
“We are incredulous that she can claim with a straight face that six years of zero interest rates has no impact” on the pricing of financial assets, according to the letter.
The firm also said it agreed with a June 29 report from the Bank for International Settlements that urged central banks not to delay exiting from emergency policy measures that cause unsustainable asset booms.
“We believe it is likely too late to avoid a painful unwinding of unconventional monetary policies given the already extreme asset mispricing and very poor market liquidity conditions,” the money managers wrote.