Cube Capital denies frontier markets funds are all risk and no return

If you can keep your head when all about you are losing theirs, then you can make a lot of money, and part of the trick of keeping one’s head in a financial crisis is to have been through a few already.

This is one reason why $1.3bn real asset manager and hedge fund investor Cube Capital is not afraid of frontier markets, where it has about 10% of its firm wide assets across hedge funds and real estate, which are typified by occasional political instability.

Francois Buclez, chief executive of multi-manager Cube Capital, is cool about ‘emerging markets’, but markedly more enthusiastic about less developed frontier markets.

Many investors believe frontier markets are promising investments, but at the same time too risky to invest in yet, given the kind of violent political risk that gripped many emerging markets years ago.

EMs have since developed sound fiscal policies, often democratic governments, and burgeoning middle classes to keep them in check. But that is not necessarily the case for frontier markets – think of Burma, of Zimbabwe, or of many Middle Eastern states now in political turmoil.

But Buclez says: “A sovereign crisis is the same everywhere except in Europe’s case, with the euro as it cannot devalue its way out. In crises the scenarios are the same and the recovery is generally the same, too.”

The list of frontier markets where Cube has money certainly includes countries better known for their instability – Zimbabwe and Ukraine to name but two.
But Buclez explains: “We have some equity in Zimbabwe, because we were relatively comfortable with distress in EMs, and we were heavily invested in the Argentina during their crisis, and then there was the 1997 Asian crisis, and [Mexico’s] peso crisis.”

For Buclez, it is all about recognising, and profiting from, predictable patterns that repeat in financial crises.

He notes a frontier market might still devalue its way out of over-indebtedness, and try for an exchange or restructuring of loans. Currency devaluation will make the country more competitive on a US dollar basis.


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