2010 Annual Report - Harbert Management Corporation

Emerging Markets
The hedge fund space has been quite competitive, especially among
smaller funds. There is competition between developed markets-centric
banks trying to provide easing and stimulus to the economy, which may
produce distortions that cause the economy to slow itself. The debt crisis
in Greece inspired sell-off, which dramatically reduced the liquidity of the
market, both for what historically would be considered liquid instruments
and for investments that would be considered second-tier or third-tier
liquidity. Also, the U.S., Europe and Japan suffered a great deal in the selloff,
and the level of activity has been suppressed. As a result, Emerging
Markets are now going to have to compete for that capital, especially as
investors see a lot of opportunity in the developed markets. So it may be
more of a situation of where EM doesn’t necessarily outperform on an
index basis, but it may outperform on an individual name basis.
Many investors have a large part of their portfolios in very low risk, or no
risk investments, designed to be capital preservation-type products. If they
make an allocation in something that may be directional and risk-based,
we must make sure we’re making good valuation-based arguments,
that the technicals are supportive of the trajectories that we’re hoping the
stock price are going to take, and that there’s a good story behind them.
Hopefully doing all of these will help us to deliver solid returns, whether
the market is providing support or not.
In this post-2008 period, the market is slower, less liquid, and it responds
to news in a much more deliberate fashion than it has before. That has
something to do with fewer participants so obviously there is less response.
And the elimination of prop desk trading and risk books at the banks
means that all the capital that would’ve been committed to the market as
risk capital just doesn’t exist. So you’ve not only reduced the number of
participants on the buy side, you’ve also reduced the number of participants
on the sell side, making it a much more difficult market where you have to
decide what to do and stick with it. Historically, when the market had more
of a trading dynamic, pre-2008, that was not as much of a concern. Now it
can be quite slow and it can take time for stories to develop. We are a lot
more patient since May and June about responding to market conditions.
At the same time, a stalemate in the market has been causing us to range
trade since the first quarter of this year. So rather than basing valuations
on very long-term projections in terminal values, now we’re looking at
three-month to two-year horizons, making our portfolio a bit more dynamic
and responsive to whatever the current conditions are.
in this post-2008 period,
the market is slower, less
liquid, and it responds
to news in a much more
deliberate fashion than it
has before.
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