Emerging markets – country selection key


Carl Tohme had a stellar 2009, up 66.72%, but he also “takes pride in protecting the downside.” In 2013 the MSCI Emerging Markets Equity index was down 8% while his fund was up 9.23%. Although the quantum of outperformance may sound extraordinary it has in fact been quite typical for Tohme. Since he launched the fund in 2008 the index has more or less gone sideways, whilst he is up 124% after fees, which must imply gross returns of at least 170% (before fees of two and 20 plus costs). The average annual gross outperformance works out close to 18%. Shrewd asset allocation decisions have made most of the returns: Tohme estimates that 80% of his performance comes from country and sector selection with only 20% from stock-picking, partly because correlations between EM stocks in the same market and sector are so high. So last year Tohme had hefty weightings in some “off index” markets such as the United Arab Emirates, Qatar, and Saudi Arabia. Tactical timing also helped; it would be wrong to assume that Tohme must have avoided markets such as Turkey, a market he has followed for many years. Tohme owned Turkey between January and May of 2013 partly because yields were compressing. As soon as Bernanke spooked markets with tapering fears, Tohme called time on Turkey. However, Tohme did not get short in a big way. He keeps a few shorts for hedging but makes most of his returns on the long side.


The EMEA fund also makes most of its money in emerging Europe, North Africa and the Middle East. Tohme admits that it is “hard to call the China market,” but he does have some clear views on its economy. “The world has to live with China at 6-7% rather than 9-10% growth,” he opines, but is less certain about the contents of balance sheets – particularly those of indebted provincial governments. Consequently, Tohme does not trade the Chinese market. He feels more comfortable with Korea as a beneficiary of US growth and technology, and also seems enthused by Mexico’s reform agenda. These two exporters illustrate a core theme for Tohme: emerging market corporates selling into developed markets should benefit from weaker currencies.


Tohme rarely hedges currency risk, as he generally only buys a market when he can stomach the currency. This is not a worry in his favourite Middle Eastern markets, which are pegged to the US dollar. The team visit key markets like Turkey and Russia at least once a year. Tohme runs $300 million in his own fund and has another $80 million sub-allocated from other funds. He makes his own decisions, but a 5% drawdown would prompt a team discussion.


when adjusting for product size, or for backfill bias, it seems the consultants’ recommendations still underperform. The paper concludes by expressing surprise at the extent to which plan sponsors follow consultants’ recommendations! Jabre hopes this area of research may galvanise institutional investors into acting independently of consultants. Clearly Jabre Capital is quite willing to invest in building institutional-quality infrastructure, but they do not see why the institutionalisation of the hedge fund business has to imply lower risk and return targets.


Jabre argues that hedge funds have lagged long-only equities since 2008 because post-crisis hedge funds cut volatility and sacrificed returns in response to the agenda dictated by the near-omnipotent consultants. Anyway, Jabre do not see volatility as an adequate measure of risk. Jabre Capital’s risk manager and author of Contingent Convertible (CoCo) Notes: Structure & Pricing, Jan De Spiegeleer provides CoCos as an example of an instrument that might only


have single-digit volatility, but which clearly entails hidden blow-up risks akin to selling a put option. In any case, Jabre points out that mid-teens volatility only works out at about 1% per day.


Jabre sees a rich opportunity set for hedge funds, partly because the banks’ withdrawal from proprietary trading removes what were once the biggest competitors. In today’s less crowded markets Jabre expects to flourish. Jabre sees huge scalability for its liquid hedge fund strategies; JabCap has run peak assets around $6 billion with Jabre himself running over $7 billion at GLG. Cecil sees Jabre, aged in his early 50s, as being at “peak mental fitness and not bored at all.” Cecil points to luminaries such as Julian Robertson and Michael Hintze starting hedge funds around this age. “If you have good health and have fun you never need to retire,” says Jabre, who feels fund management is a cerebral, not a physical occupation. Says Cecil, “This is just the beginning – the next 10 years will be the big run.” THFJ


17


“Jabre is a traditional hedge fund manager in the mould of George Soros, Julian Robertson and Michael Steinhardt.”


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