Money pours into EM debt

A SURGE of money flowing into emerging market (EM) debt is creating an unusual problem for some specialist hedge funds: they have more cash than they can comfortably put to work.

According to a Bloomberg report, several investment firms focused on distressed and hard-to-access EM debt are beginning to turn away new investors or prepare to cap their assets under management, arguing that excessive size can become a disadvantage in niche markets.

Among them is Shiprock Capital Management, which invests in distressed debt opportunities in countries such as Venezuela, Argentina and Ukraine.

Bloomberg reported that the firm has stopped accepting new capital after its assets under management exceeded US$1bil.

Broad Reach Investment Management is facing a similar dilemma.

The firm, which manages around US$3bil, plans to close its flagship fund to new investors once it reaches its target asset ceiling later this year.

While growing assets are usually viewed as a sign of success, managers in the EM debt space say there comes a point when more money can actually make it harder to generate strong returns.

Many of the markets they invest in are relatively small and illiquid, meaning large purchases can move prices and sizeable positions can be difficult to exit when conditions change.

Frederick Schroder, chief executive officer of Shiprock Capital, told Bloomberg that maintaining flexibility remains critical.

“You still want to be nimble – you still want to be able to buy and trade and remain liquid,” Schroder said.

“Infinite capital is not your friend in the space.”

The growing popularity of EM debt comes as investors search for alternatives to developed-market bonds.

Government bond yields in major economies including the United States, the United Kingdom and Japan have climbed sharply, prompting some investors to look elsewhere for returns.

Bloomberg cited data from Bank of America and EPFR Global showing that EM debt funds recorded their seventh consecutive week of inflows, attracting US$3.1bil in the week ending May 27.

The trend is benefitting a wide range of specialist managers.

Sandglass Capital Management, another distressed EM debt investor, has seen its assets rise to roughly US$1bil from about US$600mil a year earlier.

According to Bloomberg, the firm is becoming increasingly selective about new opportunities as its asset base expands.

The challenge facing these firms highlights a longstanding reality in EM investing.

While the opportunities can be attractive, many markets simply lack the scale to absorb large amounts of capital.

Evgueni Konovalenko, managing partner and head of strategy and business development at ProMeritum Investment Management, cited an investment in Uganda as an example.

According to Bloomberg, the position eventually represented around 3% of the firm’s portfolio.

However, despite liking the investment, ProMeritum could not significantly increase its exposure because of the size of the market relative to the size of the fund.

“Because we manage a US$1.1bil fund, we cannot scale that position further,” Konovalenko told Bloomberg.

“Small, niche markets like Uganda simply lack the depth to absorb larger capital allocations. So we choose to be prudent.”

That ability to move quickly and invest in overlooked corners of the market has helped ­specialist hedge funds outperform broader EM debt benchmarks.

Bloomberg reported that hedge funds focused on EM bond strategies have delivered average returns of 33% since the beginning of 2024.

By comparison, hard-currency EM bond indices gained 19% over the same period, while local-currency bond indices returned 11%.

Many investors believe the asset class still has room to grow despite the recent rally.

Bradley Wickens, partner, chief investment officer and chief executive officer of Broad Reach, argued that global portfolios remain underexposed to developing economies.

“The world is under-allocated to EMs, capital flows need to return to this universe to rebalance portfolios,” he told Bloomberg.

He added that EM assets continue to appear historically inexpensive across a range of measures, including real interest rates, local currency investments and equity valuations relative to developed markets.

The inflows into the sector have been substantial.

Bloomberg cited data from hedge fund research firm HFR showing that EM hedge funds enjoyed their strongest year for net inflows in more than a decade during 2025.

In the first quarter of this year alone, the sector attracted approximately US$1.67bil in new capital, marking the strongest quarterly fundraising performance in three years.

Performance has also been impressive at several leading firms.

According to Bloomberg, ProMeritum has not recorded a single losing year since launching in January 2015.

Sandglass has generated a cumulative return of 318% since its inception in 2013, more than four times the gain achieved by Bloomberg’s index of EM debt funds.

Shiprock, despite being established only in 2023, has already delivered returns exceeding twice the performance of the benchmark index, Bloomberg reported.

HFR data cited by Bloomberg show that performance gains have added roughly US$27bil to assets managed by EM hedge funds since the start of 2024.

Another US$2.6bil has come from net investor inflows during the same period.

Yet even as some managers restrict access to their flagship funds, they are finding new ways to deploy capital.

Rather than focusing solely on publicly traded bonds, several firms are expanding into alternative credit strategies and private debt opportunities.

Bloomberg reported that Shiprock launched a new fund earlier this month with more than US$100mil in commitments.

The strategy will target special situations in the secondary loan market.

Sandglass is also broadening its offering.

The firm recently launched its third private credit-style strategy, targeting US$250mil over a five-year period.

The first fundraising close, completed in April 2026, raised just under US$100mil, with a final close expected next year.

For managers operating in distressed debt, the attraction remains straightforward: opportunities continue to emerge as countries, companies and borrowers periodically encounter financial trouble.

“The asset class is attractive,” Michelle Kelner, co-founder of Sandglass Capital, told Bloomberg.

“Somebody’s always getting in trouble and EMs have typically traded with excess risk premium.

“That’s the beauty of EMs.”