Alternatives Emerging Market Long/Short

Investment Objective

PGIM Fixed Income's Emerging Markets Debt Long/Short Strategy seeks to maximize its total return in excess of ICE BofAML 3-Month LIBOR (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.

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.

Investment Philosophy

The Emerging Markets Debt Long/Short investment 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:

 
Sub-Strategy Description Favorable Market Characteristics for Sub-Strategy Pro-Forma Strategy Allocations
Country and Macro Long/short positions based on fundamental views and value between countries and macro top down views - Attractive valuations (long and short)
- Strong directional market trends
- Short-term market dislocations (long and short)
50%
Pairs Relative Value (Intra-Country) Long/short positions in “pairs” of similar securities within a country when their spreads diverge, typically due to market technicals - Heightened U.S. Treasury vol
- Elevated spread vol
- Strong investor flows (technical mispricings)
20%
Quantitative FX & Rates Long/short positions based on country relative value in FX and duration driven by quantitative variables - Divergence across individual country economic cycles
- Strong directional trends in FX and rates
15%
Volatility Delta-neutral positioning in currency and credit derivatives to capture volatility risk premia and skews - Steep volatility curves
- Above average implied volatility vs. realized
10%
Opportunistic Carry Long positions in high conviction, shorter-maturity, high-yielding issuers - Short-term market dislocations
- Spikes in market volatility
5%

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.

Senior Portfolio Managers

 

David Bessey

Managing Director and Co-Head of Emerging Markets Debt Team

 

Cathy Hepworth

CFA, Managing Director and Co-Head of Emerging Markets Debt Team