| While the majority of hedge funds in the region have | | | | continue to be highly volatile and politics often way the |
| their operations located in the Brazilian cities of Sao | | | | economic systems. In spite of this, management feels |
| Paulo or Rio de Janeiro, Argentina, despite the political | | | | comfortable trading out of such rare environments and |
| and economic uncertainty that continues to affect the | | | | usually sees an opportunity even where investing may |
| country, has attracted its share of funds as well. | | | | seem politically incorrect. |
| Almost all funds located in the country are | | | | Explorador Fund |
| headquartered in Buenos Aires, and use their base in | | | | Explorador Capital Management, LLC is a boutique, |
| Argentina as an advantage pertaining to investments in | | | | multi-strategy investment manager seeking superior |
| the country. | | | | returns in emerging markets. The firm was founded by |
| The Argentine market presents significant opportunity | | | | Andrew Cummins in 1996, with support from the |
| for those hedge funds looking to examine: 1) | | | | Donald Fisher family, founders of Gap, Inc. and Farallon |
| Distressed opportunities in the corporate debt space; | | | | Capital. Mr. Cummins has invested in emerging markets |
| 2) Equities that trade at the lowest valuation in the | | | | for nearly twenty years. He sits on the board of two |
| region; 3) Sovereign debt in the local and international | | | | publicly traded companies located in Brazil and Chile. |
| market. Argentine corporate and sovereign debt | | | | He is a graduate of Harvard Business School and UC |
| issues have experienced massive rallies in recent | | | | Berkeley. Explorador has a team of twelve people |
| months due to declining risk aversion globally and | | | | located in Argentina, Chile and soon Brazil. The |
| growing confidence that the government of Cristina | | | | fund’s primary focus is marketable equity securities, |
| Kirchner can avoid a sovereign credit event in the near | | | | long and short, as well as fixed income. |
| term. Argentina CDS spreads have narrowed from | | | | Since inception of the hedged strategy in January |
| approximately 4,000 basis points at the height of the | | | | 2004, the fund has delivered annualized returns of 9%, |
| crisis to 700 basis points currently. Equities have rallied | | | | compared to 12% for MSCI Emerging Markets and |
| over 100% in the last six months. | | | | negative 1.5% for the S&P 500 during that same |
| After the 2001 debt default and the political noise in | | | | period. The fund has, since inception, consistently |
| recent years, Argentina has not been on the radar of | | | | maintained low volatility of 9% on an annualized basis, |
| many global or even emerging markets hedge funds. In | | | | versus 15% for the S&P and 27% for the MSCI |
| fact, Argentina’s equity market was recently | | | | Emerging Markets index. During the challenging period |
| delisted from the MSCI Emerging Markets index, and is | | | | of January 2008–August 2009, Explorador (-4.2%) |
| now classified as a Frontier Market. Brazil, and to a | | | | preserved capital to a much greater extent than |
| lesser extent Chile and Mexico, command the majority | | | | emerging markets and U.S. Stocks, both of which are |
| of investor attention in the region. Consequently, those | | | | down over 30% over the same time frame. 79% of |
| hedge funds based in Argentina have been, at times, | | | | the time, Explorador’s monthly returns have ranged |
| able to benefit from less researched corporate bonds | | | | from -2% to +4%, compared to only 34% for the |
| and stocks. While liquidity in many Argentine assets is | | | | MSCI Emerging Markets index. Explorador places |
| poor, hedge funds in Argentina typically have fewer | | | | heavy emphasis on capital preservation through |
| assets under management than their Brazilian | | | | different market environments. Explorador offers |
| counterparts and are thus able to traffic in these less | | | | monthly liquidity and a minimum subscription of |
| liquid assets. Sell-side research efforts focused on | | | | US$100,000. |
| Argentina have also been cut back in recent years, as | | | | Explorador pursues a hedged approach to investing |
| investment banks have reduced costs associated with | | | | primarily in Latin America, maintaining a net long |
| a small market. This allows local funds to benefit from | | | | exposure ranging from 10% to 50%. Depending on |
| their in-country contacts, conduct in-depth research | | | | macroeconomic conditions and the overall market |
| efforts not being done elsewhere, and often secure | | | | environment, the manager uses its discretion to |
| outsized returns as a result. Local funds maintain and | | | | manage net exposure to preserve capital in more |
| develop good relationships with senior management at | | | | turbulent periods, seeking to capture and exceed the |
| locally domiciled companies. Given the size of the local | | | | longer-term expected equity market returns. Many |
| market, access to CEOs and CFOs is often easier | | | | emerging markets have historically suffered from |
| when compared to other countries in the region or in | | | | suboptimal public policy with respect to promoting |
| emerging markets. Furthermore, private equity | | | | resilient and sustainable growth. Some of these |
| investment opportunities can present themselves in | | | | economies are also inherently more cyclical due to a |
| industries such as real estate and agribusiness at very | | | | stronger dependence on commodities prices. Volatility |
| attractive valuations. Being located in Argentina allows | | | | in emerging markets has been higher than in the U.S. |
| local funds the ability to access these opportunities | | | | and Europe. As a result, our hedged approach has |
| thanks to their web of contacts. | | | | succeeded in delivering superior risk-adjusted returns. |
| Argentine assets should continue to trade at a | | | | Explorador seeks to deliver double-digit absolute rates |
| substantial valuation discount when compared to its | | | | of return with single-digit volatility. |
| investment grade rated counterparts in Brazil, Chile and | | | | The Explorador investment team seeks to find |
| Mexico. Additionally, with a questionable | | | | businesses going through change. It then engages in a |
| macroeconomic policy mix, investment managers | | | | fundamentals-based, bottom-up analytic approach to |
| globally may shy away from committing on the ground | | | | security selection of firms where that change is not |
| resources to the country. As a result, those hedge | | | | well understood by the market. The seven-person |
| funds located on the ground in Argentina garner the | | | | investment team seeks to identify investment |
| potential to deliver outsized returns in a less | | | | opportunities with asymmetric risk-return distribution of |
| competitive marketplace. | | | | expected outcomes and securities that are mispriced. |
| Convex Fund | | | | The fund seeks to capture value that will be realized |
| Convex Fund is a hedge fund managed from | | | | over a six to 24 month time frame. Explorador’s |
| Argentina and specialized in Latin America. The fund is | | | | investment team engages in over 250 meetings with |
| multi-strategy and multi-asset class. The book is | | | | company management teams per year. Investment |
| divided among several strategies, including but not | | | | committee meetings occur weekly to discuss current |
| limited to long-short equities, dollar fixed income relative | | | | portfolio positioning and new investment ideas. |
| value, local currency fixed income relative value, Latin | | | | Investment team members provide detailed written |
| American currencies and distress. The Fund’s | | | | reports on each company under consideration for the |
| strategy varies according to the global environment | | | | portfolio, and these reports are available to investors. |
| and the regional situation, but is flexible enough to shift | | | | No region in the world has proven immune from the |
| from purely quantitative-oriented relative value trades | | | | sharp recessions affecting the United States, Japan |
| to special situations or distressed assets. Generally | | | | and Europe. Emerging markets are no exception. Latin |
| speaking, Convex follows a top-down approach (i.e., it | | | | American and other economies are decelerating and |
| is a macro fund with focus in Latin America). The | | | | expected to post zero or slightly negative growth for |
| exceptions to this rule are the equities and distressed | | | | 2009, as external demand for raw material exports |
| strategies, which are carried out using a bottom-up | | | | has fallen dramatically. Importantly, Explorador expects |
| approach. Management is highly experienced in trading | | | | that Brazil, Mexico and Chile, its key target countries, |
| Latin American assets, and has more than 40 years | | | | will prevail through this global crisis with no banking |
| of combined experience in doing so. Management’s | | | | system collapse or sovereign credit default. Flexible |
| track record in running Latin assets goes back to the | | | | exchange rates, which have served as shock |
| late 1980s, and has 10 years of proven and audited | | | | absorbers, have been key to this resilience. Exchange |
| track record managing hedge funds, with an average | | | | rates are at much more attractive and competitive |
| yearly return of over 15% and virtually no negative | | | | levels today. These countries also exercised prudence |
| years. Although based in Buenos Aires, returns come | | | | during the last six years and took advantage of the |
| from different markets, such as Ecuador, Venezuela, | | | | boom in commodity prices to pay down debt levels |
| Mexico, Brazil and Chile. Convex has presence | | | | and accumulate foreign reserves. Despite slowing |
| wherever there is a liquid market to trade and a | | | | economic conditions in Latin America, the major |
| situation that could generate alpha. Although there | | | | countries are well equipped with fiscal and monetary |
| have been significant improvements in many of the | | | | tools to counteract the slowdown. |
| countries in the region, Latin American markets | | | | |