Top Emerging-Market Hedge Fund Steers Rout with Bullish Bets

For the past decade, developed-market stocks have mostly outshone emerging markets. But for Carrhae Capital, the Blackstone Group Inc.-backed hedge fund that’s handed its investors the best emerging-market equity returns among peers this year, the tide is turning.

Ali Akay, the London-based chief investment officer of Carrhae, expects returns on developing-nation equities to surpass those of the U.S. and Europe. Emerging markets didn’t fully benefit from low interest rates in the past decade and the potential for more stimulus, especially from China, should provide some support.

“We are optimistic on the trajectory of emerging markets,” Akay said in an interview. “Asset prices haven’t been juiced up as much. We just got through almost a decade of underperformance versus U.S. assets.”

EM stocks remain relatively cheap compared with U.S. peers

While the pace of recovery in emerging economies outside of China has been weak, growth will accelerate from the second quarter of next year as central banks feel little pressure to remove accomodative policy, with persistently easy Fed policy and a weak dollar, according to Morgan Stanley.

Since many of their central banks are at record-low interest rates already and therefore have less room to act if their economies continue to crater, China is the country that really matters, Akay said.

The People’s Bank of China “has been a lot more conservative than any developed market central bank this year in their response to the pandemic,” he said. “China does not want to see the economy adding more leverage at this point and they still have room on the fiscal side so that is where the incremental stimulus is coming from. That does not mean that they don’t have firepower to use in exigent circumstances.”

Read: China’s Massive Stimulus Pile Will Fuel Economic Recovery: Chart

Carrhae Capital’s long-short strategy has returned 9.5%, after fees, this year through August, according to the firm. That makes it the best-performing fund focused on emerging-markets, among those with assets of more than $250 million, according to Singapore-based data provider Eurekahedge Pte. Long-short managers buy stocks they expect to rise and hedge those bets with sales of borrowed shares they hope to buy back at a cheaper price.

‘Ears to the Ground’

Source Article