Hedge Fund Bets on ‘Disruption’ in Riskiest Emerging-Market Debt

(Bloomberg) -- Pavel Mamai was in South Africa last year when he got a tip: President Jacob Zuma was locked in a feud with his finance minister. The feud turned into a firing, the firing turned into a selloff -- and Mamai’s subsequent purchases help explain why the fund has returned almost 10 percent since inception as peers lost money.

Now, the co-founder of ProMeritum Investment Management sees similar opportunities in Turkey, Ukraine and, yes, even South Africa once again. London-based ProMeritum, Latin for "gain" or "deserve," is all about profiting from agitation, Mamai says. The fund run by the emerging-market debt firm manages about $267 million.

Hedge Fund Bets on ‘Disruption’ in Riskiest Emerging-Market Debt

"While we see the macro environment is obviously influencing everything, it’s not where we try to make money," Mamai, 46, said in an interview in New York. "We are trying to make money with things happening inside the emerging markets. It’s always around market disruption."

ProMeritum’s aim is to profit from political, structural or corporate disturbances within developing-nation debt markets, rather than betting on the long-term growth potential of a nation or company. It makes relatively few "high conviction" trades at key market junctures.

The fund’s story began back in 2002, when Mamai met his future partner and co-founder Anton Zavyalov, now 48, at Renaissance Capital in their native Moscow, where both worked at the time. Their paths separated when Mamai left for Lehman Brothers in 2007. After the bank’s bankruptcy, Mamai joined Nomura and in 2010 moved to Goldman Sachs.

Zavyalov stayed at Renaissance. In 2014, the two ex-colleagues decided to launch their own hedge fund and ProMeritum was born.

A preference for highly concentrated trades led the fund’s performance to diverge from that of indexes and more diversified portfolios. It’s up 1.4 percent this year, while hedge funds dedicated to emerging markets lost 3.2 percent on average in that span, according to Hedge Fund Research Inc.

What doesn’t go into concentrated trades, they keep in cash. As emerging markets sold off in sync with a rising dollar and trade tension in recent months, they put about two-thirds of their portfolio into cash, near an all-time-high.

"If you want to hold it for carry, you have ETFs and you don’t need us," Mamai said. "Also, if you hold an asset just for carry, if there is disruption you will be on the wrong side. We’d rather hold cash."

Of the fund’s remaining allocations, 22 percent is in Ukraine, while the rest is scattered in fractions across African and former Soviet states. ProMeritum is ready to dig into new idiosyncratic opportunities.

"It is actually the time to do research and put positions on," Mamai said.

Here’s a look at the fund’s top picks:

Ukraine

  • Fund added to investments last March on expectations Ukraine would be more willing to comply with IMF directives to resume bailout loan
  • Ukraine has amended anti-corruption laws and is nearing a deal on natural gas, finance chief Oksana Markarova said this month
  • Mamai said it’s only a matter of time before the IMF resumes aid; the fund is awaiting that moment before adding to its exposure

Turkey

  • Mamai said investors typically favor authoritarian regimes in emerging markets as long as they’re stable
  • Recep Tayyip Erdogan’s consolidation of power in Turkey is appealing; once power dynamics and the economy stabilize, investors may return
  • Central bank’s decision not to hike rates reinforced belief in current disruption and potential recovery
  • Mamai will visit Turkey to scout opportunities

Eskom

  • ProMeritum interested in investing in the South African public utility company; said its business model is unsustainable and leading it to a low point
  • Utility could then recover with state support and appropriate reforms

Russia

  • Fund took shorted positions on Russia assets last year, based on idiosyncratic factors
  • Always monitor Russian politics; exposure is limited to 3 percent to isolate from any geopolitical risk

©2018 Bloomberg L.P.