Alt Investments

Latin American Hedge Fund Group Takes Advantage of the Region’s Volatility

Contributing Editor 2 November 2005

Latin American Hedge Fund Group Takes Advantage of the Region’s Volatility

Buenos Aires-based Copernico Capital Partners believes they can deliver consistent positive returns in one of the most economically volatile...

Buenos Aires-based Copernico Capital Partners believes they can deliver consistent positive returns in one of the most economically volatile regions of the world, Latin America. WealthBriefing talked to CCP’s chief investment officer Ricardo Maxit about his firm’s strategy and the Latin American market in general for high net worth investors. WealthBriefing: Can you tell me the hedge fund strategies you follow? I understand you mainly concentrate on event-driven hedge fund strategies, is this because you are based in Latin America? Mr Maxit: Our investment philosophy is based on the continuous search for consistent, positive returns. While Latin American markets are known for their historic volatility, we believe that it is possible to produce consistent, positive returns by pursuing a three-pronged strategy. The three central elements of this strategy are:

  • An event driven, short to medium-term gain component, which means that we focus on identifying and investing in relatively liquid securities, both debt and equity, that have an identifiable and relatively short term (1 month to 6 months) catalyst that will cause a re-pricing;
  • A momentum component, whereby on an opportunistic basis, we seek to identify and take advantage of overbought and oversold conditions, which are typically very short-term in nature (1 day to 1 month), focusing on extremely liquid securities, typically sovereign debt, currencies or tradable indices, to generate short-term gains, and;
  • A current income component. By investing in high coupon fixed income instruments with relatively short dated maturities and of relatively high credit quality, we can generate a base return for the portfolio without much volatility.
In terms of the investment process, we use the following steps to implement the strategy shown above. Most of our time and effort, and most of the P&L generated, are devoted to and derived from the first element of this strategy – the event driven component. As such, our approach is research intensive, and we believe that our local Latin American presence, combined with the 60 years of combined experience of the firm’s three partners, provides us with a big advantage, not only in terms access to data, but also the ability to interpret it correctly. We also place a high degree of importance on risk control to limit downside volatility, employing such techniques as tight stop loss rules, portfolio diversification, maximum position size and limited use of leverage. WealthBriefing: Do your funds attract HNWs, what proportion of the fund is HNW money? Mr Maxit: HNWs invest directly into our funds and indirectly through fund of funds and private banking agreements. Our breakdown is as follows: 58 per cent are family offices; 13 per cent HNWIs; 10 per cent institutions; 17 per cent fund of funds; and 2 per cent the management team. WealthBriefing: Are you investors international – from where? Mr Maxit: Fifty-seven per cent of our assets come from Latin American investors, principally family offices and high net worth individuals, 23 per cent from Europe and 20 per cent from the US/Caribbean. WealthBriefing: What investment opportunities does Latin America provide in the hedge fund area – would they be of interest to international investors given the history of volatility in the region? Mr Maxit: In our opinion, Latin American markets remain to a large extent markets that are not crowded. In our view, our strongest point lies in the fact that the main component of our strategy (event-driven) allows us to focus on situations in which illiquidity and some other factors have led to a pricing inefficiency that we may be able to capture while mainstream investors overlook it. Volatility is definetively as important as return for us. Our fund provide investors the right vehicle to have exposure to Latin America investment opportunities with very low volatility. The class B shares of our fund has had an average annual return of 17.77 per cent with an annualized volatility of just 3.21 per cent since inception in October 2003. WealthBriefing: What are your AUMs, staff numbers and profitability? Mr Maxit: We run $312 million in three funds and two managed accounts. We are 16 people in two offices (Buenos Aires and Montevideo), with five of them focusing on investments. WealthBriefing: Is there much local investor appetite for hedge funds, how are their perceived in Latin America/Argentina? Mr Maxit: The hedge fund industry is in its early stages here. Family offices and professional investors are the main investors in this type of alternative in Latin America. There is a lot of room to develop in this area, particularly when regulations in Latin American countries allow pension funds to invest (as it is currently happening in countries like Colombia or Peru through structured notes). WealthBriefing: Can you give other investment areas international HNWs might be interested in Latin America? Mr Maxit: Traditional equity and bond market are the preferred market for HNWs WealthBriefing: What are your future plans to launch more funds? Mr Maxit: We are focused on continue growing in our flag ship fund until it reaches its capacity of around $300/350 million. We have in mind for the future a fund that can invest in more illiquid type of assets, particularly in special situations.

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