Behind VR Global’s Big Argentinian Bet

The emerging-markets specialist outperformed the market by being heavily exposed to Latin America and Ukraine.


Illustration by II

VR Capital Group visits countries even the most daring tourists would never set foot in. It has investments in Ukraine, Venezuela, El Salvador, and Tunisia, among others.

This is how it goes for hedge funds that specialize in emerging and frontier markets.

But the investors at VR Capital, headed by Richard Deitz, are not exactly tour guides looking to take impressionable visitors to unique sites. The firm’s main fund, VR Global, looks for distressed securities and event-driven/special situations with a strong emphasis on emerging and frontier markets. Hence the portfolio of dicey destinations.

But Deitz and his team certainly know how to safely navigate through this dangerous world.

Last year, the hedge fund was up 27.86 percent, according to the firm’s December monthly report, obtained by Institutional Investor. In the past three years, it has compounded at an 11.78 percent annualized rate, compared with 10 percent for the S&P 500 and just 0.93 percent for the Credit Suisse Emerging Markets index, the report says.

Since its 1999 inception, VR Global has compounded at a 19.1 percent annualized clip, compared with 7.29 and 7.23 percent for the two other benchmarks, respectively, per the document. In fact, over its lifetime it has suffered only five losing years, of which two were less than 1 percent and just one was a big loss — a 46 percent decline in 2008. It was up 1.4 percent in January.

VR Global declined to comment.

The firm has found opportunities over time in both sovereign and corporate debt, particularly in countries going through some sort of macroeconomic dislocation or crisis — or in the case of corporates, sectors experiencing secular or cyclical challenges. These opportunities are often seen in emerging markets, where the confluence of sovereign and corporate distress is possible.

This especially includes Argentina, where VR Global has been investing for some two decades and in recent years has sharply boosted its exposure. At year-end, Argentina accounted for the bulk of the fund’s 53 percent exposure to Latin America.

“Argentina played an expectedly outsize role in our returns,” VR Global told clients in its December letter. “This was almost entirely a function of the large weighting of the country in our portfolio.” Indeed, the fund’s top four contributors in 2023 came from Argentina, led by its provincial debt holdings.

In the letter, the hedge fund reminded clients that at the beginning of 2021 it began making its case that Argentina would return to a pro-market course following elections in 2023. Indeed, the firm is excited about the new president, Javier Milei, who has “embarked on a radical course correction” since his December inauguration. The government has instituted drastic fiscal tightening and devalued the peso by 50 percent.

The administration also issued an 83-page decree with 360 articles covering labor reform, privatization, deregulation of economic activity, and the lifting of restrictions on foreign trade, among other policies. This was followed by a 351-page omnibus bill covering tax, pension, and electoral reforms; a tax amnesty; privatizations; hydrocarbon law amendments; and other things.

Of course, these radical changes have resulted in numerous court challenges and a union strike, in a country with a history of promising reform that never seems to successfully lift it out of a multigenerational economic and inflationary crisis. But this time, Milei just might accomplish what those before him couldn’t — or so VR Global’s team thinks. The hedge fund stressed in the letter that there are already notable impacts from his policies.

Until now, VR Global made most of its money in Argentina from provincial debt. But going forward, it believes there is more upside in sovereign debt — although the firm expects this paper to be more volatile.

“Going into 2024, we are excited about developments in Argentina,” the hedge fund told clients. “The country is in for a rough, cold-turkey adjustment, but on the other side could be a country which practices self-help instead of self-harm.”

The other big VR Global bet is on Ukraine, which is believed to account for most of the firm’s 22 percent exposure to Eastern Europe. The hedge fund said that in 2023 exposure to Ukraine generated significant returns there from new investments and from the recovery of positions negatively impacted in 2022 by the war.

VR Global acknowledged the high complexity and risk of investing in the country. But it noted that macroeconomic performance “was surprisingly strong” in 2023, as GDP grew an astonishing 5.7 percent, inflation subsided, and the currency remained stable. The firm stressed that it is looking to its corporate and quasi-sovereign debt holdings in Ukraine for further upside,. In the second quarter, it is seeking a sovereign debt restructuring.

The firm also said in the letter that it expects a “wave of frontier market sovereign restructurings to conclude this year. These include Ethiopia, Ghana, Sri Lanka, and Zambia. Meanwhile, El Salvador, Egypt, Tunisia, and Pakistan, four countries whose debt has recently traded at distressed levels but have managed to avoid default, will be continuing to attempt to repair their credit profiles.”

VR Global is actively investing in airlines, too, including Brazilian carrier GOL Lunhas Aereas, working with other investors on DIP (debtor in possession) financing ahead of GOL’s bankruptcy filing on January 25. VR Global is also active in Venezuela, stressing that the Maduro administration “took major steps toward rapprochement with the U.S. and Europe in 2023.”