Covepoint's Ko Reaps 22% Gain on Em…

Covepoint's Ko Reaps 22% Gain on Emerging Currencies Converging to G-10
By Beth Williams and Ye Xie - Oct 17, 2010

Melissa Ko says the blurring line between emerging markets and developed countries offers opportunities for foreign-exchange investors. The founder of hedge fund Covepoint Capital Advisors LLC should know. Ko, who oversees the firm’s $785 million flagship Covepoint Emerging Markets Macro Fund with a team of three co- managers, has racked up gains of 22 percent a year on average from its inception in 2005 through September. She started the fund at Bear Stearns Asset Management, and after Bear Stearns Cos. was bought by JPMorgan Chase & Co. in 2008, the bank spun the fund out to Covepoint. Since foreign exchange is a two-sided asset, Ko says she and her New Y ork-based team look for opportunities in relationships between currencies. “Our focus traditionally has been emerging-market currencies, but with the division between emerging markets and developed markets becoming more and more nebulous, we focus on G-10 currencies just as much,” she says. Financial turmoil of the sort that started with the subprime-mortgage meltdown in the U.S. in 2007 and roiled other developed countries isn’t exactly new for emerging-markets veterans such as Ko. Ko, 43, started her career as a trader on Citibank’s emerging-markets currency desk in 1994, just before the Mexican peso crisis sent Latin America into a skid. While Thailand devalued the baht in 1997, Russia defaulted in 1998 and Argentina in the late 1990s headed for a financial crisis, Ko worked as a market maker and proprietary trader in developing currencies at Citibank, Bankers Trust and Deutsche Bank AG. Trading Off Extremes “Many of the dynamics I learned in trading emerging-market currencies have been very helpful,” Ko says. One lesson is to try to take advantage of extreme reactions. “When other people panic, then you see it as an opportunity, and when other people are too complacent, you should start to question,” she said in a September interview at Covepoint’s midtown Manhattan office, which has a view of Central
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the response was always to hike rates massively. the fund gained 18.” she says. she says.certainly not for the sake of being contrarian -. The difference this time is that it’s the U. not raise.4 percent in 2010 versus 5. 46. “In many of their crises before.but we do question the prevailing themes to see if they really make sense.2 percent for the benchmark. Through September. “The point of maximum opportunity is when that changes. they wagered that Brazil’s central bank would break with tradition and lower. As macro investors. and countries in Europe where government balance sheets are strained. Since the crisis didn’t originate in Brazil.18/10/2010 Covepoint's Ko Reaps 22% Gain on Em… Park. They invest 80 percent to 85 percent of the fund in currencies and related instruments and also trade some fixed-income and exchange-traded funds.com/…/covepoint-s-ko-reap… 2/5 . Fund Outperformer Her willingness to move in and out of markets can create ups and downs in the fund’s monthly performance. “We tend to be contrarian -. interest rates in response to the global financial upheaval. “We tend to be aggressive.7 percent for JPMorgan Chase & Co’s Emerging Local Markets ELMI Plus Index. she says. Ko and her team figured the bank would act differently. bloomberg. a principal at Covepoint who joined Ko at Bear Stearns in 2006. dollar returns as investments in 24 emerging-market currencies. the performance has exceeded benchmarks.S. says Karthik Sankaran.” Ko says.” Sankaran.” Ko says. The fund’s gain of 22 percent annually since inception through September compares with 8. but at the same time you also have to have a sense of what is the dominant narrative at any given moment. trying to stem capital flight. Ko and her team seek to anticipate shifts in market sentiment that can create trading opportunities.S. says. Longer-term. “Y ou have to have your mind on the fundamentals. Developing nations such as Brazil and China have some of the best finances and growth prospects in the world. In late 2008. which tracks U.” Brazil Bet The Covepoint fund surged almost 63 percent in 2009 after Ko and her team bet correctly on Brazil. Ko and her team make bets based on their reading of broad global economic and market trends.

” These days. the currency-trading unit of American International Group Inc.18/10/2010 Covepoint's Ko Reaps 22% Gain on Em… The bet paid off when Brazilian central bankers cut the benchmark Selic rate five times from 13.S. Ko and her team are betting that currencies of commodity-exporting nations will strengthen over time as growth in China and other developing nations fuels demand for raw materials. when she was 13. Sankaran met Ko in 1997 while he was working at AIG Trading. “The kind of relationship we have in regard to managing the portfolio book really works well. it wasn’t the consensus for a long time. Music. and Ko was one of his clients.75 percent over the course of 2009 to a low of 8. and each trades his or her own book based on a particular viewpoint and style. 30. Glasser’s work has been more model-driven. a portfolio manager at Covepoint. Ko tends to make directional bets on the market. came to trading by way of Massachusetts Institute of Technology in Cambridge. Nicholas Britell. Alexander Glasser. she says. “We had to wait for it to pan out.. who was born in South Korea and moved with her family to the U. Trading Their Books Ko and her colleagues have different backgrounds. dollar in 2009.75 percent.” Ko says. trading at 1. Sankaran studied 19th-century European history as both an undergraduate and graduate student at Columbia University in New Y ork. where she majored in chemical engineering and minored in economics before earning a graduate degree in business at the University of Pennsylvania’s Wharton School. “We all know what one another is doing. where he studied math and physics.com/…/covepoint-s-ko-reap… 3/5 . “Our trade didn’t start to make a lot of money right away. He then worked as a journalist covering emerging markets for a time before turning to finance.” The real strengthened 33 percent against the U. Math Another Covepoint principal. 26. Sankaran is involved more with exotic options and relative value.7445 at year-end.S. Ko says each member of the team has gravitated toward particular areas of expertise. also went to Harvard. is a classically trained pianist who went to Manhattan’s Juilliard School in the pre-college division before studying psychology at Harvard College. while Britell tends to focus on frontier markets such as Egypt and Vietnam as well as emerging markets as a whole.” she says. Ko. she says. bloomberg.

through the impact on global growth -. Zooming Out Glasser says his focus has been more on the U. up from a low of $1.” he says. and broader macroeconomic trends.” Ko says the fund gained in early July as the euro rebounded from a four-year low it reached in early June. “Our tendency to question the consensus -.” The euro traded at $1. “While there’s still a lot of issues around many EU members. “In a sense. “At least right now. Ko says. emerging markets are driving a lot of what’s happening in the FX market.” Sankaran says.S. missing out as the euro sank further. we think there’s something to this idea that the developed world does have severe challenges. “Because of the importance of China as the growth driver for the world. 13.54 percent this year through September. Covepoint has done more trading in the euro and other developed-market currencies lately.” G-10 Bets In its flagship fund. His views on bloomberg.com/…/covepoint-s-ko-reap… 4/5 . “From a macro point of view.” Sankaran says developing economies such as China are exerting an increasing influence over global foreign exchange. she reversed the bet.it changes the terms of trade. the fund gained on a bet against the euro as the Greek debt crisis sent the European currency lower. “If you have a more commodity-intensive pattern.” Ko says. it benefits commodity exporters. that kind of gives you our view of how the world is going to pan out. which returned 4. When the euro got to about $1.1877 on June 7. who runs the $14 million fund.96 percent in the last four months of 2009 and lost 1.it’s more art than science.18/10/2010 Covepoint's Ko Reaps 22% Gain on Em… New Fund The firm launched the Covepoint Commodity Currency Fund in September 2009 to invest in a basket of commodity exporters such as Chile.2883 on Sept. through reserve accumulation. This year. she says. Ko says the extent of the declines didn’t make sense given the commitments made in May by Germany and other stronger economies in the region to support debtladen peripheral countries such as Greece. the euro wasn’t going to implode and cease to exist right away.” says Sankaran. Norway and Peru using funds borrowed in currencies of lowyielding. slower-growing countries such as the U.S. “Sometimes I am too early.25 versus the dollar.

P. for example. “When monetary policy is the focus.net.” she says.” he says. rates are zero. David Papadopoulos at papadopoulos@bloomberg. bloomberg. he says.” she says. “When fiscal policy becomes more important. you are in a different framework. and people have to put their money somewhere. Instead of focusing on whether the Colombian central bank was behind the curve in terms of inflation. where people are more biased to be risk averse.S. Because of that.net. ALL RIGHTS RESERVED. the aversion to risk that sent investors piling into U. it makes a lot of sense to pay attention to more idiosyncratic stories.47 percent in August may be overdone.. he says it was more profitable to zoom out. Treasuries and drove 10-year yields to as low as 2.” For Ko. “A lot of the bearishness has to do with looking into the rearview mirror in terms of wanting not to repeat 2008 again. “At the end of the day.S. To contact the reporters on this story: Beth Williams in New Y ork at bewilliams@bloomberg.net To contact the editor responsible for this story: Laura Colby at lcolby@bloomberg.18/10/2010 Covepoint's Ko Reaps 22% Gain on Em… particular smaller markets were being overwhelmed by fluctuations tied to global themes such as rising government debt loads in developed economies such as the U. Y e Xie in New Y ork at yxie6@bloomberg.net ®2010 BLOOMBERG L.com/…/covepoint-s-ko-reap… 5/5 . Ko says it’s possible the market may rally in the fourth quarter.

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