Hedge Fund Shorting Emerging Markets

June 18, 2014

Are Brazil and Turkey heading into recessions?

Emerging markets are making something of a comeback in 2014 after the Federal Reserve’s “tapering” comments triggered a disastrous sell-off beginning in May 2013. For example, the iShares MSCI Emerging Markets ETF (EEM | B-99) has eked out a gain of almost 4 percent this year after dropping by the same amount last year.

But not everyone is on board with the current rebound. To the contrary, Christopher Tsai, president and chief investment officer of Tsai Capital Corp., a long/short global equity manager based in New York, sees enough trouble in places from Turkey to Brazil and has enough conviction to actually be shorting the emerging markets altogether, and he uses ETFs to do it.

Tsai recently spoke to ETF.com staff writer Hung Tran about why he’s shorting emerging markets and why he thinks Brazil and Turkey are headed for a recession.

ETF.com: Can you give us some background about yourself and your firm?

Tsai: Our long/short fund launched in June 2011, and Tsai Capital Corp. has been managing money for primarily high net worth individuals and family offices since the beginning of 1998.

The long/short fund has about $28.5 million, and we also manage another roughly $20 million in separate accounts. Unlike a lot of other hedge fund firms, we prefer to invest for the long term. So we stay invested so long as the fundamental and the qualitative characteristics remain favorable.

We also believe in concentration as opposed to diversification, and that generally means that we prefer to hold 10 to 15 high-quality names. When it comes to shorting, we take a directional approach and we prefer to short indexes though ETFs, as opposed to just individual equities.

ETF.com: I also understand you have a very interesting financial background relating to your grandmother.

Tsai: My grandmother was a really interesting woman, and I wish that she lived longer than 93 years. Ruth Tsai was born in Shanghai, and she was the only woman to trade on the Shanghai Stock Exchange during World War II; basically from 1939 to, I believe, around December 1941 when Japanese troops came in and took over the Shanghai international settlement and the exchange was halted at that point.

But that was an amazing experience for her, because the Shanghai exchange was really the financial center of the Far East at the time. She told me when I was 10 years old that she traded everything from stocks, bonds, gold and other commodities.

So that was pretty amazing for a woman at that time, because most of those types of affairs were really handled by the so-called man of the house.

ETF.com: Which particular ETF or ETFs are you currently using to short?

Tsai: Since Tsai Capital focuses on companies with significant exposure to emerging markets, a natural hedge for us in terms of offsetting our exposure on the long book is to short the iShares MSCI Emerging Markets ETF (EEM | B-99), which is a very liquid emerging markets ETF.


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