(Bloomberg) -- A hedge fund that has posted gains every year since its inception in 2015 and had a record 16% return last year is betting on a rally in distressed emerging-market sovereigns.

Promeritum Investment Management counted Sri Lanka’s debt restructuring, Tunisian bonds and the Nigerian naira’s devaluation as the top three contributors to its performance in 2023, according to a document shared with clients. The macro fund’s performance was nearly double the 8.8% advance posted by the Bloomberg index for hedge funds focused on emerging-market debt. 

Similar gains are possible this year as Sri Lanka, Ghana and Zambia conclude debt restructurings — potentially sparking a new bond rally, Promeritum says. Slowing inflation could also provide a tailwind for local debt from South Africa to central and eastern Europe. 

“Once the restructuring happens we definitely expect the next leg” of gains, said Pavel Mamai, London-based managing partner and co-founder of the $377 million fund. “We believe that the restructurings are likely to be on better terms than what the market currently assumes. There’s still some trades on the distressed side, some prices which have not reached the full potential.”

The best gains in emerging-market debt year-to-date come from distressed or junk-rated nations with Ecuador, which restructured its bonds in 2020, topping the list with 30%, followed by Egypt and Bolivia, according to a Bloomberg index tracking sovereign dollar debt.

Kenya’s $1.5 billion sale of seven-year bonds demonstrated that even a country with stressed state finances can access the international debt market to refinance.

That “affects the market’s view on exit yields in the restructuring stories,” Mamai said. “With the right set of policies and the IMF’s support, if Kenya can access the market and refinance debt, then why wouldn’t Sri Lanka or Ghana be able to do that later?”

Sri Lanka is one of the fund’s top holdings because it has a chance of concluding its debt talks sooner than peers and on more beneficial terms to the country, Mamai said. The South Asian nation, which defaulted on foreign debt in 2022, recently sent a new restructuring proposal to dollar bondholders through its adviser Lazard.

Sri Lanka accounts for 13% of the fund’s investments, followed by 11% for Tunisia and 8% for Nigeria, according to a letter Promeritum sent to clients. South Africa comprises the largest share at 23%, with the fund betting that a fiscal rule will help anchor South Africa’s public finances and it might use central bank profits to redeem maturing bonds.

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(Updates with year-to-date returns in the fifth paragraph)

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