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Everest Capital Raises Its Profile to Attract Emerging Market Investors
This signature emerging-markets fund has gained and lost billions in its quest for the summit.
As the evening sun slips behind Biscayne Bay, a well-heeled crowd of mostly men unbutton suit jackets and loosen ties, mingling on the sprawling cobblestone terrace of Miamis Vizcaya Museum & Gardens, once the posh winter residence of farm equipment king James Deering.
But tonights crowd institutional and high-net-worth investors attending a March conference on emerging markets is less concerned with history than with the future. Wounds from the recent stock market meltdown are still fresh, but sinking money into far-flung countries with decent corporate governance, improved political stability and increasingly liquid capital markets is looking good, compared with the so-called safe bets of the developed world. And this was before Europes sovereign debt crisis erupted.
The events host, Marko Dimitrijevíc, moves through the crowd. Hes approachable yet deliberate, choosing words carefully as he answers questions from investors about Everest Capital, the emerging-markets hedge fund he founded 20 years ago. Dimitrijevíc , with an angular face, 5-foot-9 build and serious tone, is intense. But interviews with his inner circle reveal hes also notoriously cool under pressure a trait his chief risk officer describes as a combination of intellectual firepower and the ability not to panic.
It may be a case of practice makes perfect, because hes certainly been tested. Everest Capital bled nearly $1 billion when it prematurely jumped back into the manic stock markets of late 2008. Convinced that the frenzied selling was overkill and eager to take advantage of cheap valuations, Everest piled on positions too soon and paid the price for impatience. Its emerging-markets fund lost 49.6 percent in 2008 and its global fund 51.9 percent.
For Dimitrijevíc, 2008 was an historic anomaly not unlike the Russian ruble crisis ten years earlier the last time that Everest lost nearly $1 billion in less than a month, for being overexposed to Russia just as the country defaulted on its debt and devalued its currency.
But confidence in Dimitrijevíc, even back then, ran deep. In early 1999, Hungarian-born investing guru George Soros, whod had money with Everest since 1992, handed Dimitrijevíc an additional $500 million. Today, Everests 50-year-old founder says he never considered shuttering the funds, but clearly the vote of confidence came at a critical time.
Dimitrijevíc and his team hope to inspire that same loyalty now, positioning their firm as an attractive option for institutional investors eager to tap into emerging markets alluring growth story to offset the declining assets of debt-ridden developed countries. After floating largely under the radar for most of its 20 years, Everest decided to celebrate this anniversary with a bash the March investor conference, held at Miamis Mandarin Oriental hotel, attracting 121 attendees.
But the coming out party is just one piece of a larger strategy thats been in the works for more than a year: to raise Everests profile as a specialist hedge fund with a deep bench of talent that reaches well beyond Dimitrijevíc. With more staff and new offices, Dimitrijevíc wants to spend more of his time on the portfolios and with his investment teams while still boosting the firms visibility.
We wanted to show people were more than just Marko, explains Philip Godfrey, who joined Everest as its first president last summer from Irvine, Californiabased, $23 billion Pathway Capital Management, which invests in private equity funds for institutional investors. At Pathway, Godfrey was a partner and headed up the client side of the business. His new role at Everest is another sign that the firm is serious about getting its story out.
More than half of those attending the emerging-markets conference are current investors; the rest are potential investors and the consultants who advise pensions and endowments on asset allocation. One potential investor, Los Angelesbased Bel Air Investment Advisors research manager Arun Bharath, knows that his $6 billion under management needs more exposure to emerging markets. Im hoping to get some ideas on how, he says.
Its exactly this sentiment that Dimitrijevíc wants to capitalize on, and his argument for emerging markets is a compelling one. Although these markets have long been considered risky territory, their performance throughout the recent financial crisis marked a tipping point and further illustrated his thesis that emerging markets have, in fact, emerged. They represent almost half of the worlds economy, as measured by GDP, and have huge foreign reserves; they are large and liquid with volatility not unlike that of developed markets, especially in the past few years; and their corporate governance and government policies are not that far from what youd find in developed markets.
The only difference, says Dimitrijevíc, is growth potential. Indeed, emerging-markets guru Mark Mobius, who oversees $35 billion for Templeton Asset Management, predicts developing nations economies will grow four times as fast as those of the developed world, or 5 percent versus 1 or 2 percent. Jerome Booth, an emerging-markets expert and head of research at Londons Ashmore Investment Management, points out that if foreign reserves are any measure, developing markets hold most of the global economic power. Theres $6 trillion in reserves in emerging markets central banks, and about 70 percent of that is in U.S. assets. Maybe youre the Indian central bank, and youre in the euro well, now youre wondering why, says Booth. Those central banks are starting to repatriate some of those reserves and move out of Treasuries and the euro and into other currencies.
Given that the average U.S. pension fund is now allocating just 2 to 5 percent of its assets to emerging markets, Booth and Mobius predict a great shift will soon be under way.
To help him sell these investors on the emerging-markets story, Dimitrijevíc assembled a weighty group of conference presenters, including Goldman Sachs Groups chief global economist, Jim ONeill, who coined the term BRIC, and former Polish president Aleksander Kwa´sniewski. Former U.S. secretary of State and retired general Colin Powell gave the keynote address. Each speaker was introduced by a member of Everests team, and Dimitrijevíc gave the opening remarks, but otherwise, discussions with the host were informal the Everest team was always present but not in anyones face.
With $1.9 billion under management, Everest builds its portfolios from the top down, formulating a view of the world after considering macroeconomic factors as well as overall valuations, identifying global themes using some quantitative but mostly fundamental analysis and then taking positions that provide the best exposure to those themes.
When asked about 2008 and 1998 and the volatility of emerging markets in general Dimitrijevi´ c and his team point to Everests track record: its global fund boasts13.3 percent annualized returns since inception in 1990 a nice bump above the MSCI all country world indexs 5.9 percent over the same period; and to its talent: a team of 51 speaking a total of 14 languages and representing 17 nationalities. Godfrey also notes that, team members are all under 50 (aside from Dimitrijevi´ c and him), have been investing in emerging markets for most of their careers and have a lot of skin in the game 20 percent of total assets.
Still, it may not be an easy sell for Everest. New investors with a strict two strikes and youre out policy wont easily overlook Everests 1998 and 2008 billion-dollar blow-ups. Then theres todays heightened aversion to risk: At one point during the conference, an intrigued investor told Everest managing director Robert Pino that he was seriously considering an allocation to the firm, but asked whether he could be sheltered from the volatility.
Well, no. Everest, it turns out, is picky. It wants new business, but not just any investor will do. If this potential client cant stomach the bipolar nature of emerging markets, he will be advised to take a pass on Everest. We tell people right at the beginning: Well have down quarters and down years, but we believe the up years will more than make up for them, Dimitrijevíc explains behind the wheel of his Bentley en route to Everests Miami headquarters following the conference. Indeed, on the heels of its costly 2008 mistake, Everests global fund was up 52.7 percent in 2009, its emerging-markets fund climbed a healthy 75.1 percent, and its Asia fund clocked a 72.9 percent jump.
The years 2008 and 1998 were expensive lessons, but todays Everest under the savvy, cerebral investment team Dimitrijevíc has assembled in its offices in Miami, Singapore and Shanghai bears no resemblance to a firm in survival mode. And if he can tap just a portion of the institutional money eyeing the emerging-markets space, Everest may find itself one step closer to the summit.
Dimitrijevíc founded Everest in 1990. Today its not only the oldest emerging-markets hedge fund, but also one of the oldest hedge fund firms, period.
Swiss-born and of Yugoslavian descent, Dimitrijevíc discovered his lifes work at 19 when he did his first stock market trade. He was working on his bachelors degree in economics in Lausanne, Switzerland, when he asked someone at his bank how he could earn some money from his modest savings. The banker suggested buying stocks. The first one was a REIT [real estate investment trust], and that was boring, recalls Dimitrijevíc, who speaks English, French, Italian, Portuguese, Serbo-Croatian and Spanish. The next time, he bought stocks in an Argentinean oil company. It promptly doubled in two weeks, and I thought, Wow, this is pretty easy. Then it started going down, and right away I knew I wanted to find out why. I got hooked.
In the early 1980s he took his first job at a Swiss private bank, working with its global investment management team. He left to earn his MBA at Stanford University and after graduating joined PaineWebber, now UBS, where he worked for a year before investment firm Triangle Industries hired him away. There, Dimitrijevíc gained experience buying companies, investing in stocks and bonds and investing opportunistically.
The New Yorkbased firm relocated to Palm Beach, Florida, where Dimitrijevíc decided to start Everest in 1990, which he later moved to Bermuda. The new firm would invest globally in debt, equities, commodities and currencies, with a broad mandate of finding the best opportunities for long-term capital growth.
Everests next two decades reflect the wild dips and swings yet overall steady growth of the emerging-markets space. According to index tracker MSCI Barra, emerging markets made up 1.9 percent of the total global stock market in 1990, 5 percent in 2000 and 12.9 percent in 2009.
Initially, Dimitrijevíc focused on Asian stocks, special situations in the U.S., Europe and Asia and distressed debt in the U.S., but Everests global fund has always considered developed as well as emerging markets. There were more inefficiencies and less competition in emerging markets, so we were stirred in that direction, says Dimitrijevíc, who started with $8 million of his own money as well as some contributions from early investors.
Financial crises in emerging markets in the 1990s created opportunities for the burgeoning firm. In 1994, after Mexicos devaluation of the peso, Everest concentrated on emerging-markets debt. A lot of that debt traded for 40 or 50 cents on the dollar, and we thought it was money good, says Dimitrijevíc. Soon he began taking positions in Eastern Europe and Asia, primarily shorting currencies during the buildup to the Asian financial crisis in 1997.
By 1998, Everest was actively investing in Russia, primarily in stocks but also in local government bonds and some Russian government bonds, when, spurred by Asias woes, world commodity prices tanked. Commodities accounted for 80 percent of Russias exports. Everest believed that Russia would do a controlled devaluation, in which the central bank would sell foreign reserves at a steady pace to support an orderly downward shift in the exchange rate. We were surprised, as most of the world was, when they did an uncontrolled devaluation and a default at the same time, which was a first, Dimitrijevíc recalls. Adds John Malloy Jr., Dimitrijevícs No. 2 and a 14-year Everest veteran, The chances of doing both are extremely low because not only are you hurting the local population by devaluation, youre killing the financial sector at the same time [by defaulting on domestic debt].
Everest soon ended up on the wrong side of a very big bet: 40 percent of its emerging-markets fund was invested in Russia. It lost more than 50 percent, and Everests global fund fell by 40 percent. It was pretty bad, recalls Malloy, who joined Everest from Baring Asset Management. But we sat down and looked at what our options were.
Dimitrijevíc says he never considered shuttering the funds, but the Russian debacle was clearly one of the teams most challenging periods. It was a shock, says the animated, Swiss-born Thomas Allraum, Everests Europe and South Africa expert, who joined the team in 1997 from the U.K.s M&G Investment Management, later taken over by Prudential. What you thought was a certainty became very uncertain all of a sudden. The outlier comes in, and you obviously learn a very expensive lesson.
Everest imposed strict new rules as a result of its mistakes in Russia, the biggest being concentration of assets. Alan Spies, a physics Ph.D. whos been with Everest since 1998 and is now its chief risk officer, says Russia taught Everest it had to set limits on both geographic and industry concentration as well as maximum position sizes. It now caps exposure to a companys stock or bond to 7.5 percent of a fund, and has a country limit of 15 percent and a global industry limit of 20 percent. There is also a 20 percent cost stop-loss on all liquid positions.
After the Russian rout, Everest needed a lifeline. In early 1999, George Soros tossed one out, investing an additional $500 million in its funds at a critical time. I explained to him and [Soros top portfolio manager] Stan Druckenmiller what happened and what I learned, Dimitrijevíc recounts during a lengthy interview in one of Everests offices, an immaculate glassed-in space decorated with stunning artwork from emerging-markets countries and boasting a wraparound view of Miami Harbor. (Dimitrijevíc sits with the rest of the team in a large, open work space.) I guess it sounded like I was a fairly intelligent guy who made a mistake and learned from it. They offered me an opportunity: Did I want to run a larger amount of money for them? We did. (Soros and Druckenmiller declined to comment.)
Dimitrijevícs responses to questions about the Russian bet are succinct. He declines to offer details on the deal with Soros, including the fee structure, and insists he would have kept the funds open with or without Soros support: As long as there was one investor who still had confidence, I was going to manage his money and make back what I had lost him. Because thats the deal.
Amid the chaos of 1999, Everest moved its headquarters from Bermuda to Miami to be closer to a major airport with frequent flights to Everests main markets. Dimitrijevíc liked the quality of life in south Florida, but there were other reasons to avoid New York. Were out of the whole groupthink mentality here, and its definitely helpful, says Malloy. Were not living with the constant buzz of the same ideas and the same trades.
Everests next challenge would arrive with the bear market of 2002 but it turned this one into an opportunity. Dimitrijevíc says the Russian experience taught Everest to consider all scenarios. So when Brazil and Argentina defaulted, it was prepared: Everest bought the distressed bonds of some of the bigger Argentinean companies, such as Telefónica de Argentina, which paid off, as did the firms move six months earlier to aggressively buy Pakistan stocks shortly after the terrorist attacks in New York on September 11, 2001. We felt the U.S. and NATO would keep pouring money into the country, Dimitrijevíc says matter-of-factly of the post-9/11 bet. The Pakistan investments quadrupled over the next three years.
But Everest would face another painful lesson during the financial crisis and subsequent stock market meltdown of 2008. Long bullish on emerging-markets fundamentals, Everest believed that as the U.S.-based credit crisis gathered steam, emerging and developed markets would continue decoupling and that emerging markets would outperform. We pounded the table and said, The selling of emerging markets in light of the crisis in the U.S. and a few Western European countries is completely overdone, Dimitrijevíc recounts. But we underestimated the level of panic that was going on, the complete rush to the exits everywhere.
Everest had reduced its exposure earlier in 2008, but began rebuilding positions in the third quarter. We were just too early; we were too willing to stay invested when we should have listened to the market and pulled back, says Spies. We may think were right, but you can lose a lot of money while waiting for the market to come around to your point of view.
Everest senior managing director Stanley Shi, a Mobius trainee who is now Everests point man for China, recalls that in early 2008, from his office in Singapore, he saw the credit crisis as a buying opportunity. There are very few export businesses listed in China most are banks, oil companies, telcos and I thought they were very cheap, says the fast-talking Shi, 34, over breakfast in Miami. It turns out, when liquidity needs to get out of the market, it doesnt matter. Outflows in 2008 hit 11 percent but combined with inflows resulted in 3 percent net withdrawals.
In the first few months of 2009, the firm kept its exposure low as the markets continued to sell off. During that period its global strategy fund was down 5.7 percent, while the MSCI all country index was down 17.4 percent. When markets stabilized in March, we took our exposure back up and captured most of the upside last year, says Dimitrijevíc.
The crash of 2008 would teach Everest the value of listening to technical indicators, the mathematical data tracking price and volume in a stock market. Everests strategy in approaching companies and investments hasnt changed since 2008, but its willingness to stick with positions going against it has diminished. The senior investment and risk committees sat down and said, If A, B and C happens, we cut exposure, says Spies.
The firm also maintains a highly liquid portfolio. The stocks it holds must have a minimum daily trading volume of $10 million. Illiquid holdings, which Everest defines as listed stocks that would require ten or more trading days to liquidate, make up less than 5 percent of its portfolios.
The advantage of greater liquidity is that if an investment thesis is working, Everest can nimbly follow it around the world and continue to scale up. It also prevents analysts from spending a lot of time on researching illiquid stocks that will never result in a large position in the portfolios, says Spies.
The chief risk officer also stress-tests Everests holdings in both normal and crisis scenarios twice a month. He says the firm could liquidate 80 percent of all its portfolios in one trading day in normal times and in less than five trading days during a period of financial stress. Explaining these risk management tools will be important as Everest continues its push into the institutional investor market. Today its investor mix is 50 percent institutions, including pensions, endowments and foundations; 20 percent high net worth and family office; 20 percent Everest partners and employees; and 10 percent funds of hedge funds. More than half of Everests investors have been in the funds for more than ten years, and as president, Godfreys job is to grow that portion of loyal investors with a long-term horizon.
In the past it was a bit more haphazard, with no systematic effort to engage the more committed, longer-duration sources of capital that we think fit our style, says Godfrey, 51, a former senior officer with Blackstone Groups alternative asset management business. Everests target is North American and European institutional investors, and sovereign wealth funds any sophisticated investor with experience in global and hedge fund investing that wants more-specialized strategies.
Everest invests across all asset classes equity, debt, currencies, commodities and options and typically holds positions between one month and a year. The firm continues its strong global macro approach across five strategies: global ($600 million as of January 2010), emerging markets ($500 million), China opportunity ($315 million), alpha ($150 million) and Asia ($150 million). The firm also has a frontier markets strategy, incubated by Everest and a long-term large investor, that has $90 million and will be launched in the next quarter.
Everests main themes today circle around the growing power of the emerging-markets consumer, housing in emerging markets, Russian mining and steel industries, Indian corporates, Indonesian banks, frontier markets Nigeria and Bangladesh, and European luxury goods, the last driven by growing demand in emerging markets. We really like the luxury goods manufacturers in Europe right now, given the depreciating euro, says Malloy. Their goods are cheaper, and the demand out of Asia for these brands is just getting stronger.
Everests bets in China are all consumer-related plays; it owns shares in a sports product manufacturer, an advertising firm and an Internet company. We focus not on an index but on the best opportunities, Malloy explains. we had a lot of exposure in China at one point, and now its just a few percent. Indonesia is just 2 percent of the index, but we have 10 percent of our fund there.
Much of Everests success results from its analysis and investment savvy. But what seems to be key in pulling everything together is a flat, highly communicative and intellectually challenging culture.
Shi, like Allraum, was lured by the opportunity to escape the constraints of long-only investing and join a hedge fund. Both liked the idea of specializing in a particular region while developing themes with the rest of the team based on how events in that region would impact the world. And they liked Everests horizontal structure. So many organizations have a big boss over there, and you report to many people before it gets to him, says Shi, who has an MBA from the London School of Economics and Political Science. I was an analyst when I joined Everest, and from the beginning, I talked directly to Marko.
New recruits endure what many on the team describe as an excruciating interview process. Luis Laboy, managing director for Latin America, joined Everest in 2002 from Dresdner RCM Global Investors in San Francisco, where he helped manage an emerging-markets portfolio. He got the job after peppering Everest with his résumé for months. It was the swiftness of decision making that is really what I found attractive, says the tall, engaging Laboy, 39, born in Uruguay to Puerto Rican parents who later moved to the U.S. mainland. When you interview at Everest, you meet everyone. Youre compensated for how the team does how the portfolio does overall so you really want to know someone new can work with everyone.
Portfolio managers and analysts each have an allocation of capital to use at their own discretion: typically, between 2 and 5 percent of the portfolio. If successful, they pitch the senior investment team on boosting exposure. If we get on board with the theme, then we really push the trade, says Malloy.
Everest seems to attract people wired in much the same way as its founder. They all come across as brainy without being socially awkward, and incredibly driven. But its Dimitrijevícs ability to stay calm when trades go sideways that has instilled confidence in the entire team. Theres a lot of smart people out there, but not that many of them can continue to think rationally when positions are going against them, says Spies.
Dimitrijevíc, who has a wife and three children, ages nine to 17, and a passion for underwater photography, says its in his genes. My family survived the Turks, survived the Nazis, survived the Communists, so the gyrations of the market compared to that is really a minor thing. That helps keep things in perspective, says Dimitrijevíc, who grew up in Italy, Switzerland and the former Yugoslavia. The fact Im rarely fazed by anything means people are comfortable coming to me with bad news, so we can continue the dialogue. If people make mistakes, we try to understand where they came from rather than yelling or looking for scapegoats.
A flat structure is key to generating the best investment themes, he says. We foster an environment thats intellectually challenging and pleasant to work in, and attract people who do well in that environment, Dimitrijevíc says. In other words, we dont tend to attract prima donnas.
It was that team dynamic that helped convince Bruce Madding, chief financial officer for the Menlo Park, Californiabased Henry J. Kaiser Family Foundation, to hand over 8 percent of the U.S. health policy nonprofits $600 million to Everest just months after the Russia debacle. Madding had been looking at Everest since the mid-1990s but didnt invest until 1999. I thought, This is one of the brighter people out there, Madding says, describing Dimitrijevíc as insightful with an engaging mind. He learned from some of his past mistakes, and we just thought, heres a long-term person who understands these emerging markets better than most.
Then again, no amount of good dynamics will convince investors who can forgive one billion-dollar bad bet but not two. Once, thats fine. But two times in ten years? says a large fund manager, who asked not to be named. He says hed consider a manager that was down 10 to 15 percent in 2008, but not the 51.9 percent fast bleed of Everests global fund. Its too volatile for a hedge fund, regardless of being in the emerging-market space, he says. Their returns are good, but with all that vol, I cant take it and more importantly, I cant sell it.
Indeed, the standard deviation (a measure of volatility) for Everests global fund was 22.7 percent in 2009, compared with 15.7 percent for the MSCI all country world index. For the same year its emerging-markets funds standard deviation was 27.2 percent, compared with 25 percent for the MSCI emerging-markets index.
Godfrey responds to critics by pointing to changes the firm has made since 2008, but he acknowledges that emerging-markets investing requires a strong stomach: Sophisticated investors understand that month-to-month volatility comes with the territory.
Dimitrijevíc, a master of the volatile, is ready for the ride.