By Laurence Fletcher
Asset management giant BlackRock Inc., a star bond trader at
Barclays PLC and a major hedge fund are among the investors nursing
losses from Turkey's violent market trading in recent days.
The Turkish lira's falls on Friday and Monday, which were among
the largest moves in any currency in recent years, and spikes in
the country's borrowing costs, caught several major investors
wrong-footed.
BlackRock, the world's largest asset manager and the largest
foreign holder of Turkish government bonds, had been running
outsize positions in Turkey in some of its actively managed funds
when the crisis hit.
The firm's $5.8 billion Emerging Markets Local Currency Bond
Fund, for instance, has fallen 7.1% this month through Tuesday,
according to FactSet. The fund had a 7.6% exposure to Turkish
government bonds at the end of July -- including a 5.5% weighting
in the lira-denominated bonds -- compared with the benchmark's 5%
weighting, said a person familiar with the matter.
The fund also had a larger-than-benchmark position in the lira
itself. While BlackRock partially reduced this before the worst of
the selloff last week, this still contributed to losses, the person
said. The fund also was hit by bullish bets on wider emerging
markets.
The firm's $3.5 billion Emerging Markets Bond Fund, which
invests in dollar-denominated bonds, is down 3% this month. It had
a 4.4% allocation to Turkey at the end of July, above the
benchmark's 3.5%.
In a call with investors on Tuesday, head of emerging-markets
fixed-income Sergio Trigo Paz said he saw a 60% chance of a partial
de-escalation of Turkey's problems, a 20% chance of a full policy
U-turn by the Turkish government, and a 20% chance of an escalation
in sanctions, leading to further contagion in emerging markets, the
person said.
After Monday's fall, the Turkish lira has recovered somewhat the
past two trading days, rising more than 6% at one point
Wednesday.
A spokeswoman for BlackRock declined to comment.
Meanwhile, Tolga Kirbay, a star trader of Turkish assets
recently hired by Barclays from BNP Paribas SA, had run up a loss
of as much as roughly $20 million on his book, said a person
familiar with the situation. However, that has been balanced by
hedges elsewhere in the credit business, and the bank hasn't
suffered any significant losses in its business overall, the person
said.
Hedge fund firm H2O Asset Management, which runs $27.4 billion
in assets, was also caught with positions in Turkey as the crisis
unfolded, according to an update sent to clients on Tuesday and
reviewed by The Wall Street Journal. The firm's Allegro fund, which
specializes in trading currencies and bonds, is down 12.6% this
month.
H2O said in the note that it increased its holdings of Turkish
government bonds and the lira at the end of July and early this
month. It said it expects the volatility of recent days to subside
and said "a decisive domestic policy reaction is unavoidable."
H2O didn't respond to a request for comment.
The losses come after a violent period for Turkey's markets,
driven by U.S. sanctions and concern over President Recep Tayyip
Erdogan's unorthodox economic policies, coupled with a
strengthening dollar and higher U.S. interest rates.
The lira has tumbled 20% this month, while yields on Turkey's
lira-denominated two-year bonds have jumped to 30.8% as of
Wednesday from 19.8% at the end of July and 13.8% at the end of
April.
Among other investors to suffer is HSBC Global Asset
Management's Emerging Markets Debt fund, which is down 5.5% drop
this month, taking losses this year to 12.5%. The fund was running
a 7.7% exposure to Turkey at the end of June, according to an
investor update.
Earlier this month Nishant Upadhyay, who oversees more than $18
billion in assets as head of emerging-market debt, told The Wall
Street Journal that he couldn't "sleep easy" holding positions in
Turkey but added that "the bar for us to give up on Turkey would be
fairly high" because of the high yields on its bonds.
HSBC declined to comment and declined to make Mr. Upadhyay
available.
Asset manager GMO LLC also took a hit on some holdings. It held
positions in Turkish stocks such as Koc Holding, which is down
nearly by half in dollar terms this year, and Turkiye Garanti Bank,
which is down 65% this year, according to FactSet.
The fund has been bullish on emerging-market value stocks in
general, a position it is sticking with, says Ben Inker, GMO's head
of asset allocation.
"Part of investing in emerging markets is understanding that
idiosyncratic challenges hit different countries at different
times, often creating interesting investment opportunities," he
said in a statement to the Journal.
Christopher Whittall contributed to this article.
Write to Laurence Fletcher at laurence.fletcher@wsj.com
(END) Dow Jones Newswires
August 15, 2018 10:37 ET (14:37 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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