[imagesource: sashares.co.za]

Let’s get the business jargon out of the way.

Hedge funds are investments, using pooled funds, that then employ different strategies to earn active returns for their investors.

To put it simply, hedge fund managers predict where a market will go in the interest of generating profits.

London-based ProMeritum Investment Management LLP has taken a keen interest in South Africa. According to Bloomberg, the company has allocated one-fifth of its money to “South African government bonds”.

It’s betting on a 15% rally in the next three to six months in response to the South African Reserve Bank’s aggressive policy easing and bond-buying in the secondary market. ProMeritum manages $320 million, and handed investors a 9.6% return last year.

South African government bonds are among the worst performers in emerging markets this year so at first glance, this investment makes no sense – until you take a closer look at the company.

ProMeritum founders Pavel Mamai and Anton Zavyalov are known to make risky bets. So far, they’ve been very successful.

Pavel Mamai and Anton Zavyalov […] argue that the coronavirus-induced crisis is different from typical emerging-market crises, as the risk of depression is pushing central banks to prioritize growth, while accepting currency depreciation as an inevitable release valve. Some emerging markets have not yet priced in the new reality, notably South Africa, where yields could tighten 150 basis points as bonds benefit from positive carry returns.

South Africa’s yield curve steepened to a record in May as investors piled into shorter-end securities after the central bank cut its policy rate to a record low. In dollar terms, however, the bonds have been among the worst performers in emerging markets as the rand’s slide to a record low against the dollar in April eroded returns. With inflation slowing and the economy set to contract as much as 6.1% this year, longer-dated debt may rally in coming months, ProMeritum’s founders said.

Mamai and Zavyalov reckon that with Treasury funding in “the short end of the curve”, medium to longterm investment could yield positive outcomes.

Is their faith in the country good news for the future of our economy?

Let’s wait to see if they win again.

[source:bloomberg]