Bloomberg News

Ko’s Covepoint Fund Fell 38% in September on Currency Bets

October 06, 2011

(Updates with company comment in sixth paragraph.)

Oct. 6 (Bloomberg) -- Covepoint Capital Advisors LLC, the hedge fund founded by Melissa Ko, fell 38 percent in September, posting its biggest monthly loss after sticking with a bet that emerging-market currencies would gain against the U.S. dollar.

The decline left the New York-based firm’s biggest fund with a loss of about 25 percent for the year, according to investors, who asked not to be identified because the information is private. The $824 million Covepoint Emerging Markets Macro fund had 84 percent of its assets in currencies, with a fifth of the portfolio invested in Mexico, according to an Aug. 31 letter to clients.

The Mexican peso, Brazil’s real and the South African rand have plunged at least 14 percent against the dollar since the beginning of August on concern that slowing growth in the U.S. and Europe will hurt export-reliant countries. Investors had flocked to developing nations earlier in this year on expectations that they would outperform developed economies.

“Emerging markets haven’t attained a safe-haven status and they haven’t decoupled” from the U.S. and Europe, said Alex Bellefleur, an economist at investment-consulting firm Brockhouse & Cooper Inc. in Montreal. “When directionally markets are de-risking, it doesn’t really matter whether the fundamentals in emerging markets are better. They sell off.”

Hedge funds focused on emerging markets lost an average of 4.9 percent this year through August, compared with the decline of 1.9 percent by the broader industry, according to Hedge Fund Research Inc., a Chicago-based research firm.

“We’ve always been a volatile fund,” said Jonathan Taylor, an official at Covepoint. “Historically we’ve made higher highs and we’re confident that we’ll do so again.”

More Easing Seen

Ko, whose firm oversees $1.1 billion, told investors at the end of August that it was likely the U.S. Federal Reserve would seek to stimulate growth by initiating a third round of asset purchases, known as quantitative easing. She also said that efforts by China to make the yuan more widely available would erode the dollar’s value.

“Considering the above factors, we have maintained our broad directional biases in favor of currencies that will benefit from global reflation and against the U.S. dollar,” Ko wrote in the investor letter, a copy of which was obtained by Bloomberg News.

Fed policy makers at their meeting last month held off on further quantitative easing. They instead said the central bank will replace $400 billion of its Treasuries with longer-term securities in an effort to reduce borrowing costs for businesses and consumers.

Bear Stearns Roots

The dollar has surged more than 9 percent against the world’s most traded currencies since stock markets started swooning in August as investors seek a haven from risky assets.

Emerging-market currencies rallied yesterday after policy makers in Turkey and Russia stepped up sales of foreign-currency reserves to counter the selloff in developing-nation assets.

Ko’s emerging-markets fund had returned an average of 22 percent since it was started at Bear Stearns Cos. in 2005, according to the investor letter. JPMorgan Chase & Co. spun out the fund after buying Bear Stearns in 2008. Ko’s worst month before September was October 2008, when the fund plunged 28 percent after markets were roiled by the collapse of Lehman Brothers Holdings Inc.

Hedge funds profiting from wagers that slowing growth would hurt emerging markets include London-based GLG Partners Inc.’s Atlas Macro fund, which gained about 16 percent since July, and Monaco-based Pivot Capital Management Ltd.’s Global Value fund, which is up 21 percent in the same period, according to investors. Executives at the firms declined to comment.

Brazil Options

GLG Atlas Macro, managed by Driss Ben-Brahim and Jamil Baz, made money betting the dollar would rise against emerging-market currencies, said a person familiar with the matter who asked not to be identified because the firm is private. Pivot, which manages $780 million, purchased options that would profit if interest rates fell in Brazil, according to a person familiar with the matter.

The bet stemmed from a prediction that China’s investment and real-estate boom was unsustainable, and nations such as Brazil dependent on exporting commodities to the Asian country would be hurt, said the person, who declined to be identified because the firm is private.

Pivot’s wager paid off in August when a futures contract tied to rates on Brazilian government debt due in 2013 plunged 17 percent. Brazil’s central bank unexpectedly cut borrowing costs Aug. 31 after raising rates at its previous five meetings to protect the economy from a worldwide slump.

Violent Correction

Pivot’s investment managers predict asset prices in emerging and developed markets will continue to decline, undermining stock market gains experienced during the first six months of the year. The firm’s Global Value fund, which is managed by Carl George, has gained 361 percent since its founding in 2002.

“As we entered the second half of 2011, this major dissonance between the market resilience and grim fundamental picture has since been violently corrected,” Pivot told clients in an Aug. 31 letter obtained by Bloomberg News. “This correction will prove to be the beginning of a new bear market in assets that have been artificially inflated by government intervention.”

--With assistance from Michael Patterson in London and Selcuk Gokoluk in Istanbul. Editors: Larry Edelman, Josh Friedman

To contact the reporters on this story: Jesse Westbrook in London at; Saijel Kishan in New York at

To contact the editors responsible for this story: Edward Evans at; Christian Baumgaertel at

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