Orbix Global Partners are pioneers in emerging markets trend-following. Eurekahedge caught up with Luciano Correa to talk about their recentky-launched offshore Emerging Trends fund.
Luciano, congratulations on the launch of your offshore fund. Can you give us a brief introduction on your key investment decision-makers and their backgrounds?
On 1 September, we launched Orbix Emerging Trends LP, a programme for trend-following in the emerging economies for offshore investors. AUM of Orbix Emerging Trends is US$5 million at launch. The fund has an emerging market scope with a Brazil-focus. Wave-trends in the emerging markets have historically had a different behaviour as compared to those in G7 markets, wherein most trend-following funds tend to trade the same trends. Because of the low correlation between emerging markets instruments and G7's, Orbix will reduce the correlation in existing G7 trend-following funds in an investor's portfolio.
The managers are:
Alexandre Bourgeois is a director of Orbix Global Partners Ltd. A trend-follower since 1994, Alexandre founded Orbix while managing his own investments. Alexandre pioneered the trend-following strategy in emerging markets and was the first trader to use it in Brazil. Alexandre's primary responsibilities are programme research and development, and risk control.
Prior to Orbix, Alexandre founded and served as CEO for iConexa SA, a software company based in Brazil, from 2000 to 2001. Prior to iConexa, Alexandre was the founding partner of AAA Asset Management, a Brazilian hedge fund. From 1997 to 1999 Alexandre was a managing director of Banque Société Générale in São Paulo.
From 1995 to 1997 Alexandre was a partner of the Bear Fund, a London-based hedge fund. Prior to the Bear Fund, Alexandre was at Bear Stearns Inc in New York, from 1991 to 1995, working for the international proprietary desk where he held several positions trading Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela, Hong Kong, Indonesia, Malaysia, Thailand and South Korea.
Alexandre has a BS in mathematics from Geneva University (1990).
Alexandre is a registered fund manager at the Brazilian Comissão de Valores Mobiliários and a member of the sub-committee of hedge fund regulation of the Brazilian Association of Investment Banks and Securities Dealers (ANBID). Alexandre is also a director of Orbix Global Partners Administração de Recursos Ltda and Xibro Axia Administração de Recursos Ltda, both companies incorporated in Brazil.
Cassio Lopes is a director of Orbix Global Partners Ltd. Cassio's primary responsibilities are trading and middle-office operations.
Prior to Orbix, Cassio held several positions of responsibility. From 2000 to 2002, Cassio was a director of Bank of America, responsible for its Latin American sovereign debt trading. From 1999 to 2000, he was a VP at J.P. Morgan & Co - Brazil, in charge of fixed income trading in São Paulo. From 1996 to 1999, he was a VP at J.P. Morgan & Co - UK, in charge of sovereign debt trading in London for emerging markets including Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Panama, Peru, Venezuela, Bulgaria, Croatia, Poland, Russia, Algeria, Ivory Coast and Morocco. From 1991 to 1996 he was a foreign exchange trader at J.P. Morgan & Co - Brazil in São Paulo. From 1988 to 1991, Cassio was a trader in gold and foreign exchange at Citibank in São Paulo.
Cassio has a BA in economics from Pontifícia Universidade Católica in São Paulo (1991) and attended The Morgan Finance Program in New York (1994).
Cassio is also a director of Orbix Global Partners Administração de Recursos Ltda and Xibro Axia Administração de Recursos Ltda.
Luciano Corrêa is a director of Orbix Global Partners Ltd. Luciano's primary responsibilities are fund-raising and client relationship.
Prior to Orbix, Luciano was a founding partner of Mídia Investimentos in 1997, and consolidated the out-of-home media industry in Brazil, through Billboard Partners, a US$75 million dedicated buy-out fund for the billboard industry in Brazil. Prior to Mídia Investimentos, Luciano held positions at Brahma (now InBev), Brazil's leading brewery, and GP Investimentos, the leading buy-out firm in Brazil. Prior to GP Investimentos, Luciano was an associate at S.G. Warburg & Co Ltd in London.
Luciano holds an MBA and a master in international affairs from Columbia University (1991) and a BA in economics from Universidade de São Paulo (1984).
Luciano Corrêa is a board member of Brasil Mídia Exterior. Luciano is also a director of Orbix Global Partners Administração de Recursos Ltda and Xibro Axia Administração de Recursos Ltda.
How much of your portfolio, on the average, is invested in Latin America versus the rest of the world?
The focus is trend-following in emerging markets, with particular emphasis in the Brazilian markets.
Although Orbix has the ability to trade all markets that comprised the Investment Universe (financial instruments of 19 emerging countries), the Brazilian markets play an important role in the trading strategy. One important objective of Orbix's programme for the Brazilian markets is to try to reduce the correlation between the traditional existing G-7 managed futures funds and Orbix, so as to reduce the correlation in investors' current allocation to the CTA or emerging markets strategy in their portfolios.
Because of the low correlation of the Brazilian markets Orbix trades versus the "traditional" G-7 instruments, Orbix believes the partnership can reduce the correlation to existing managed futures or emerging markets funds in an investor's portfolio.
Is there a difference in portfolio construction for your onshore and offshore funds?
The onshore fund is a CTA investing in the commodity markets normally traded by traditional CTAs, financial instruments of G7 countries and financial instruments of Brazil. We are offering it to Brazilian investors who seeks diversification away from emerging countries' exposure.
What are your views on the Latin American economy and how does that impact your fund?
Our views on Latin America and on Brazil's economy do not impact the trading of Orbix. We are trend-followers - what we don't do is to predict trends.
The foundation for Orbix's analysis is the study of market prices, rather than market fundamentals or the prediction of trends. Orbix's investment philosophy has been based on the assumption that market prices, rather than market fundamentals, are the key aggregator of information necessary to make investment decisions and that market prices, which may at first seem random, are actually related through time in complex, but discernable ways.
This philosophy is based on analysis of historical data that revealed that market adjustments sometimes form price trends that can be exploited for profit. Orbix believes there is an inherent return opportunity in participating in trends which its systematic and analytic models have identified. Orbix's trading programmes may participate in either rising or falling trends; they do not have a directional bias nor do they try to forecast or predict market turning points. Once Orbix has established a position in a market that has been identified as "trending", no pre-set price target for profits is established given the highly variable nature of trends.
Orbix's understanding of the nature of markets is based on the hypothesis that investors' expectations adjust at different times and manifest themselves in long-term price trends. Markets do not adjust immediately to new information. The investment decision process has been designed to analyse and exploit these trends. Orbix's maintains the view that market prices initially react to new or emerging information or events, but the aggregate impact on price may be a lengthy process. While prices may at first represent an over- or under-reaction to new information, prices eventually will reflect all relevant information. In other words, anything that could possibly affect the market price of a financial instrument - including fundamental, political, or psychological factors - eventually will be reflected in the price of that commodity or instrument. The foundation for Orbix's analysis is, therefore, a study of market price, rather than market fundamentals or the prediction of trends.
Orbix believes that the price adjustments process takes time, since reactions of market participants to changing market dynamics initially may be inefficient; that is, investors may not react immediately to information because of differing evaluation processes, differing levels of risk tolerance, or uncertainty. Gradual price adjustments manifest themselves in long-term trends, which themselves can influence the course of events and from which profit opportunities can arise. Orbix believes that such market inefficiencies can be exploited through a combination of trend detection and risk management.
Trend-following models determines crucial decisions such as:
- How and when to enter the market?
- How many contracts to trade at any time?
- How much money to risk on each trade?
- How to exit the trade if it becomes unprofitable?
- How to exit the trade if it becomes profitable?
How do you determine investment opportunities?
How do you determine which markets to trade?
Market selection then becomes a function of four key factors: volatility, reliable historical database, liquidity and market organisation.
Liquidity is a key aspect to the selection, as the nature of the trend-following strategy demands the ability to enter and exit markets without causing disruptions in prices.
Market organisation is another important aspect, as markets that have organised future exchanges, usually provide clearer rules, stronger operating procedures and higher leverage than those over-the-counter markets. Brazil's futures exchange, Bolsa de Mercadorias & Futuros (BM&F), is the world's fifth largest futures exchange by number of contracts and the leading futures exchange in the emerging markets.
The market selection and the determination of the financial instruments that comprise the investment universe is not fixed and changes over time, as the Brazilian markets, and the emerging markets in general develop, and as liquidity increases and organisation improves. It is possible that markets cease to be part of the investment universe, as sometimes, certain markets suffer lack of liquidity or undergo periods of disorganisation and unrest.
How volatile are the interest rates in 2005 as compared to the mid-90s?
Current interest-rate environment in Brazil is less volatile - approximately four times - than in the mid-90s.
Do you think the growth in non-fuel commodity prices, as seen in 2004, is sustainable in the years to come?
We do not predict prices - we follow them.
Do you see a further decline in inflation rates in 2005?
We do not predict inflation - we follow it. However, it seems that as far as Brazil's economy is concerned, current market expectation is that it should remain flat at approximately 4-6% per annum.
What are the macroeconomic risks in Latin America in 2005?
Currently the macro risks have been mitigated.
Structurally the free-floating of the currencies reduce border risk as the central banks do not have to intervene as much. If the Latin American economies continue to integrate in a free trade zone with the United States, those risks are going to be reduced even further. The more integration, the lesser the macro economic risks.
On balance of payments, which is another aspect under high scrutiny, trade balance is strong.
On the political front, democracy seems to be well established and the voters - in all Latin American countries - have showed a trend to abandon "messianic leaders" and concentrate on the rather laborious activity of actually running the countries with hard work.
In your opinion, do you think your counterparts in Latin America will be launching offshore vehicles?
Yes. Recent market studies show that offshore funds are more competitively structured to take advantage of market opportunities as they, in general, do not have to follow as many regulatory limitations as the onshore funds.
How is your capital raising process going? Are there any travel plans dedicated to fund-raising in the near future?
The investor base for systematic trend-following is clearly offshore as this is a new strategy for most Latin American-based investors. Meeting investors face-to-face is a natural aspect of our business. We do travel frequently - as often as one week a month in New York and London.
How do you find Brazil as a base for hedge fund managers?
Very competitive for emerging market fund managers.
Do you think there will be substantial growth in the Latin America hedge fund industry?
Unlikely in the near future for onshore funds but this is more likely for offshore funds. The growth in Brazilian investors' allocation to alternative investments in onshore funds in general seems dependent on a significant reduction of the local interest rate, currently at 19.75% per annum on sovereign debt.
In Mexico, growth of the AUM of hedge funds seems dependent on the enactment of a new regulatory framework.