EM investor Ashmore faces short sellers

Emerging markets signOnce in the emerging markets 'sweet spot', London's Ashmore Group now faces more threat from hedge funds that may want to short sell its shares after investors returned to developed markets.

Ashmore, which floated in 2006, is a successful specialist emerging markets investor, but its tight focus on the high growth regions arguably leaves it exposed to the tapering of quantitative easing (QE), just as the performance of emerging market stocks and bonds is linked to Federal Reserve liquidity.

The Argonaut Absolute Return Fund has a short position in Ashmore Group, Barry Norris, the fund manager and co-founder of London boutique, Argonaut Capital Partners, revealed this week. Norris said the ending of QE in the US prompted the action.

“We think Ashmore is uniquely vulnerable to QE ending. We think EM debt is an asset bubble that has been inflated by QE.”

Though absolute return funds normally effect short positions through contracts for difference rather than by selling physical shares, data from Markit also shows a rise in outstanding shares on loan, or “short interest”, in Ashmore over the past year.

At February 25, 2013, there were 0.9% of outstanding shares in Ashmore on loan and its share price was 362.3p (€4.3). A year later the amount of shares on loan had gone to 5.5% and the share price had fallen to 317.8p.

The level of short interest is used as an indicator of hedge fund sentiment.

The Federal Reserve’s QE programme is widely seen to have supported investment in the emerging markets.

Ashmore did not comment to Funds Europe on the outlook for its business in light of tapering.

Ashmore has been arguing harder for the emerging markets investment case. In September last year, Jan Dehn, head of research at Ashmore, said it was “just fiction” that tighter financial conditions in developed countries, in particular the US, will impact emerging markets adversely.

But Norris said this week that emerging market corporates were significantly dependent on the flow of US dollars and that yields would increase as QE tapers. Further, these markets could also be hard to exit.

However, he stressed that Argonaut’s short position was not a view on how Ashmore is run as a company.

In its unaudited interim results out yesterday, Ashmore reported a 2.7% decline in assets under management to $75.3 billion in the six months to December 31, 2013, and net outflow of $2.9 billion.

Gross subscriptions were of $7.3 billion and positive investment performance of $0.8 billion was achieved.

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