Sub-Saharan Africa: Hedge Funds' Next Frontier

Increasingly, African companies are turning to hedge funds rather than the economic development agencies designed to help them, such as the World Bank, The Wall Street Journal reports.

“It’s a combination of falling returns in all the traditional emerging markets, cash flowing into hedge funds, and high demands for commodities, combined with many of these countries are getting their houses in order,” said Marc Pagano, who leads emerging-market credit trading for Citigroup in London.

Entreprenuers in long-neglected, but rich-in-resource sub-Saharan nations such as Kenya, the Congo, Botswana, Uganda, Tanzania and Ghana turn to Citigroup to raise capital, increasing the number of countries in Africa with which the bank did business form two to 12 in only a few years.

This year, many hedge funds have been dealing in the debt of Zambia, and oil-rich Nigeria.

Mutual funds have also increased their investments in Africa. London-based Artemis Investment Management holds a 10% stake in Mwana Africa, a Congolese company focused on developing resources across the continent.  Hedge funds control another 12% of the company, according to the company’s founder Kalaa Mpinga, son of the country’s former prime minister.

In order to plug into foreign markets, Mwana, like many African mining and resource companies, has offices in financial hubs, like London.

However, many of these companies believe that hedge fund interest might be fleeting, since doing on-the-ground research on many of these companies can be daunting, and political climates in many of the countries in which they are based are volatile.

“At some stage, they will be looking to exit, but are powerful allies in the medium term,” said Rod Webster, chief executive of Weatherly International, a copper mining company with operations in Zambia.

The Bahamas-based Delamore Asset Management hedge fund has bought distressed government debt, including trade debt from Angola, a country that emerged from civil war allowing the country to pay between two and 15 cents on the dollar for $36 million in debt. As of September, the company pegged its returns on the portfolio at 45%.

Despite this growth, the amount of investment in Africa still is less than one half of 1% of the $1.66 trillion worth of emerging market debt traded in second quarter.

Still, many warn that interest in Africa is unstable, exacerbated by concerns of some investors that the companies in which hedge funds place money violate human rights.