Emerging Markets Long/Short
Table of Contents
Investment Objective
PGIM Fixed Income's Emerging Markets Debt Long/Short Strategy seeks to maximize its total return in excess of the ICE BofAU.S. 3-Month Treasury Bill Index (i.e., the alpha) on a risk-adjusted basis over a full market cycle by investing primarily in opportunities in the emerging markets sector of the global capital markets, with a primary emphasis on the fixed income and currency markets.1,2 The Strategy may also invest in derivatives for investment or hedging purposes, which may include credit default swaps, index products, currency forwards, options, and futures contracts.
Investment Philosophy
The Emerging Markets Debt Long/Short Strategy centers on relative value and directionally driven trades including sovereign and corporate long/short positioning, credit curve positioning, and local currency versus hard currency exposures with dynamic hedging of systemic risk. The intention of the Strategy is to capture alpha without relying on the “beta” return that is reflective of the economic environment.
The Strategy seeks alpha through five primary trading strategies:
- Country and Macro - Long/short positions based on fundamental views and value between countries and macro top down views
- Pairs Relative Value - Long/short positions in “pairs” of similar securities within a country when their spreads diverge, typically due to market technicals
- Quantitative FX & Rates - Long/short positions based on country relative value in FX and duration driven by quantitative variables
- Volatility - Delta-neutral positioning in currency and credit derivatives to capture volatility risk premia and skews
- Opportunistic Carry - Long positions in high conviction, shorter-maturity, high-yielding issuers
Investment Process
PGIM Fixed Income follows a disciplined, four-step approach to manage the Emerging Markets Long/Short Strategy:
1. Global Backdrop & Portfolio Strategy:
Senior portfolio manager assesses global risk appetite to determine portfolio risk profile and refine portfolio positioning, leveraging firm's resources
2. Country Analysis:
Regional economists evaluate each country from quantitative and qualitative perspective and assign internal ratings
3. Security Selection:
EM corporate portfolio managers/analysts seek to determine best risk/reward opportunities across all regions. Use proprietary tools to highlight relative value opportunities within markets.
4. Risk Monitoring:
Senior portfolio manager/risk manager employ a rigorous process to tightly monitor risk at all levels. Use proprietary tools to verify performance achieved is appropriate for risk taken.
1 There is no guarantee that these objectives will be met.
2 On average, over a full market cycle defined as three to five years.
No risk management technique can guarantee the mitigation of elimination of risk in any market environment.
Source: PGIM Fixed Income as of September 30, 2020.