BlackRock Among Investors Hit By Turkey Turmoil

By Laurence Fletcher 

Asset management giant BlackRock Inc., a star bond trader at Barclays PLC and a major hedge fund are among the investors nursing losses from Turkey's violent market trading in recent days.

The Turkish lira's falls on Friday and Monday, which were among the largest moves in any currency in recent years, and spikes in the country's borrowing costs, caught several major investors wrong-footed.

BlackRock, the world's largest asset manager and the largest foreign holder of Turkish government bonds, had been running outsize positions in Turkey in some of its actively managed funds when the crisis hit.

The firm's $5.8 billion Emerging Markets Local Currency Bond Fund, for instance, has fallen 7.1% this month through Tuesday, according to FactSet. The fund had a 7.6% exposure to Turkish government bonds at the end of July -- including a 5.5% weighting in the lira-denominated bonds -- compared with the benchmark's 5% weighting, said a person familiar with the matter.

The fund also had a larger-than-benchmark position in the lira itself. While BlackRock partially reduced this before the worst of the selloff last week, this still contributed to losses, the person said. The fund also was hit by bullish bets on wider emerging markets.

The firm's $3.5 billion Emerging Markets Bond Fund, which invests in dollar-denominated bonds, is down 3% this month. It had a 4.4% allocation to Turkey at the end of July, above the benchmark's 3.5%.

In a call with investors on Tuesday, head of emerging-markets fixed-income Sergio Trigo Paz said he saw a 60% chance of a partial de-escalation of Turkey's problems, a 20% chance of a full policy U-turn by the Turkish government, and a 20% chance of an escalation in sanctions, leading to further contagion in emerging markets, the person said.

After Monday's fall, the Turkish lira has recovered somewhat the past two trading days, rising more than 6% at one point Wednesday.

A spokeswoman for BlackRock declined to comment.

Meanwhile, Tolga Kirbay, a star trader of Turkish assets recently hired by Barclays from BNP Paribas SA, had run up a loss of as much as roughly $20 million on his book, said a person familiar with the situation. However, that has been balanced by hedges elsewhere in the credit business, and the bank hasn't suffered any significant losses in its business overall, the person said.

Hedge fund firm H2O Asset Management, which runs $27.4 billion in assets, was also caught with positions in Turkey as the crisis unfolded, according to an update sent to clients on Tuesday and reviewed by The Wall Street Journal. The firm's Allegro fund, which specializes in trading currencies and bonds, is down 12.6% this month.

H2O said in the note that it increased its holdings of Turkish government bonds and the lira at the end of July and early this month. It said it expects the volatility of recent days to subside and said "a decisive domestic policy reaction is unavoidable."

H2O didn't respond to a request for comment.

The losses come after a violent period for Turkey's markets, driven by U.S. sanctions and concern over President Recep Tayyip Erdogan's unorthodox economic policies, coupled with a strengthening dollar and higher U.S. interest rates.

The lira has tumbled 20% this month, while yields on Turkey's lira-denominated two-year bonds have jumped to 30.8% as of Wednesday from 19.8% at the end of July and 13.8% at the end of April.

Among other investors to suffer is HSBC Global Asset Management's Emerging Markets Debt fund, which is down 5.5% drop this month, taking losses this year to 12.5%. The fund was running a 7.7% exposure to Turkey at the end of June, according to an investor update.

Earlier this month Nishant Upadhyay, who oversees more than $18 billion in assets as head of emerging-market debt, told The Wall Street Journal that he couldn't "sleep easy" holding positions in Turkey but added that "the bar for us to give up on Turkey would be fairly high" because of the high yields on its bonds.

HSBC declined to comment and declined to make Mr. Upadhyay available.

Asset manager GMO LLC also took a hit on some holdings. It held positions in Turkish stocks such as Koc Holding, which is down nearly by half in dollar terms this year, and Turkiye Garanti Bank, which is down 65% this year, according to FactSet.

The fund has been bullish on emerging-market value stocks in general, a position it is sticking with, says Ben Inker, GMO's head of asset allocation.

"Part of investing in emerging markets is understanding that idiosyncratic challenges hit different countries at different times, often creating interesting investment opportunities," he said in a statement to the Journal.

Christopher Whittall contributed to this article.

Write to Laurence Fletcher at [e-mail]

(END) Dow Jones Newswires

August 15, 2018 10:37 ET (14:37 GMT)

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