Guy Norton in Almaty -

Whipsawing bond and stock prices may not be to everybody's taste, but they're meat and drink to Bahit Jolaman, founder and president of Paragon, an investment management firm based in Almaty.

A former Citibank credit analyst, Jolaman believes that the current global market volatility represents as much an opportunity to record a healthy profit as it does the threat of registering a hefty loss. A core part of the firm's historical focus is its proprietary trading book, which is split roughly one-third equities and two-thirds fixed income.

On the equities side, the book comprises selected high beta, liquid local stocks alongside international listings with established trading patterns. With regard to Paragon's positions in stocks listed on major international bourses, Jolaman says: "We trade both the long and short side of the markets. Up until mid-year I was still trying to convince myself there is a case for equities. Not any more. Our equities portfolio is much smaller, we trade ranges for small change and take profits on bear market rallies like the one in April-June or like the one we should be able to see in October, that's my hunch, anyway."

Despite claims to the contrary, Jolaman says the derivatives market in Kazakhstan remains fairly primitive. "Trading from the short side is harder in the local market, as brokers are unable to borrow meaningful amounts of stock from clients generally unfamiliar with the practice. Naked shorts gave up the ghost before they caught on here. I guess, you could make a lot of money paper trading, after all the local index has lost half its value since August 2007, but it's a little less exciting."

Junkyard

The fixed income element of Paragon's trading book, meanwhile, includes for the most part cash bonds from CIS issuers alongside a US high yield element. "The fixed income market for existing issues has been fragile in recent months while the credit implosion in the post-Lehman world has been unprecedented," Jolaman says. "I am young enough not to have followed capital markets before then, but I have memories of the high-yield carnage of the early 1990s. Paying 70 cents on the dollar then would be an invite to a vulture party. These days it earns you a 1,000 basis points over benchmark and it's hard to find a bid."

Given what in recent times can look like a Hobson's choice between bonds and shares, Jolaman plumps for fixed income as the more attractive option. "I am a high-yield investor. It's a potent asset class come of age, and I have been following it for the past 16 years. I am comfortable doing this even in the midst of the bloodbath that the market has been in recent weeks, in part, because there are no redemptions given the nature of the book, in part, because I am very familiar with credits that I buy. And, finally, I am selective. Generally, I seek alpha in addition to the intrinsic value. As such, my past and present strategy focused on events, arbitrage and distressed debt, the latter in moderate quantities. Some investments have been successful, some have been duds. Our portfolio's unleveraged compound annual return over three years up to January 2008 has been 14.6%," he says.

The other string to Paragon's bow is private equity, which was the initial focus when Jolaman established the firm back in 1999. Since its inception, Paragon has built a $55m leveraged portfolio made up of investments in cement, oil and gas, utilities, and residential and commercial real estate in Kazakhstan and Kyrgyzstan. "Opportunities with an initial investment size up to $7m are plenty, as the economy ex-commodities remains largely underdeveloped. Raising bank debt, even senior secured tranches, in the current environment is expensive, both on a price and loan-to-value basis. As the economy slows, many borrowers will become overleveraged on sales and will eventually be hurt."

Paragon has made 12 investments, of which it has exited eight to date. "All of our deals are highly leveraged. All short-term local bank debt taken out at high rates that is, at best, rolled over at maturity. At times, it can be pretty hairy. We did our last new investment in 2005. Of the remaining four investments, two have so far done OK, one is a walking wounded, one a workout. We made some money on six of the eight deals we have exited since 1999, but nothing much to get excited about. The other two gave us plenty of bragging rights. One was a construction materials play sold inside of four years to a multinational trade buyer, the other an oil asset sold to an international state-owned company. Our portfolio return, cash-on-cash, since 1999 is 22 times initial cash. It's been a lot of work and I used to have hair."

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