(Updates with bonds falling in 11th paragraph.)
July 28 (Bloomberg) -- After 23 years trading stock options at Goldman Sachs Group Inc., Merrill Lynch & Co. and his own hedge fund, Russell Abrams is piling into his most exotic gamble yet: as a Buenos Aires taxi impresario.
Abrams, 48, plans to invest as much as $100 million of his own money to build a fleet of Buenos Aires cabs, undaunted by the prospects for Argentina’s second default in 13 years, the fallout from the peso’s devaluation in January, inflation of about 40 percent and the economy’s first quarterly contraction since 2012.
For Abrams, the financial morass in South America’s second- biggest economy is an opportunity to buy medallions on the cheap from drivers in need of cash, a gambit he predicts will pay off should economic policies change when President Cristina Fernandez de Kirchner steps down next year after two terms in office. Barclays Plc and JPMorgan Chase & Co. are among banks that say Argentina is on track to repair its economy and regain access to overseas credit markets after the 2015 presidential elections.
“This is a fascinating business,” Abrams, who first visited Buenos Aires at 21 and whose wife, Sandra, is Argentine, said from his office in the capital. “When you’re trading options, you’re dealing with a kind of virtual world. This is tangible. You see your cars, you talk to the drivers. It’s harder, but the returns are also greater.”
Prices for the licenses, known as medallions, have more than doubled in dollar terms over the past six years to $24,159, and he predicts they’ll more than triple in the next five years to the levels of those in Santiago and the Uruguayan capital of Montevideo.
A Buenos Aires taxi investment can bring annual returns of 25 percent to 48 percent, with the highest gains for drivers who own their medallions and cars, according to Mariano Otalora, the director of the Buenos Aires-based Argentine School of Personal Finance.
“Taxis in Buenos Aires can be an interesting option for a foreign investor with significant capital who understands the risks,” he said.
Abrams has bought 30 taxi licenses since 2008 and says that’s just the beginning. He plans to buy 1,000 more cabs, for a fleet five times bigger than the closest competitor, irrespective of rules that limit their size to 200.
“There aren’t even that many licenses for sale,” Horacio Perez, president of the Argentine Taxi Business Chamber in Buenos Aires, said in a telephone interview. “It sounds excessive. He’d have to set up five different companies and break the market.”
When told of the association’s concern, Abrams said he plans to set up five companies with 200 licenses each.
Abrams’s plans are even more ambitious when set against the country’s economic backdrop and its battle with holders of bonds on which the government defaulted in 2001. Argentine bonds fell to a one-month low today on a lack of progress in talks with the creditors two days before a default deadline.
Gross domestic product unexpectedly contracted 0.2 percent in the first quarter, while consumer prices rose 15 percent in the first six months of the year, government data show. Argentina devalued the peso by 19 percent in January.
On June 16, the U.S. Supreme Court rejected an appeal of a lower court ruling ordering the country to pay $1.5 billion to holdout creditors that Fernandez calls vultures at the same time it pays debt restructured after the default. The government is refusing to comply with the ruling, saying copy-cat claims would deplete its $29.7 billion of reserves, raising the specter of a new default. Without a deal or delay in its conflict with creditors, the nation will default on July 30.
“Argentina is already in an economic crisis and I believe it will bottom over the next six months,” Abrams said. “I am accelerating our license acquisitions, as people in Buenos Aires are very nervous.”
Abrams says he made a 10 percent return this year through June, or 21 percent on an annualized basis, on income from fares.
The year-to-date figure beats the 6 percent he says he’s earned at SEP Consulting, the wealth-management office in New York where he works as a fund manager. It also surpasses this year’s 7 percent gain in the Standard & Poor’s 500 stock index.
The returns to be had in Argentina can’t be replicated at home, Abrams says. While New York taxi medallions have about doubled over the past six years to $1.05 million, according to the city’s Taxi & Limousine Commission, he bets future increases won’t exceed Argentina’s.
At Goldman Sachs in the early 1990s, Abrams says he researched derivatives strategies alongside the late Fischer Black, one of the co-authors of the Black-Scholes equation used to calculate options prices. By the end of the 1990s, he was co- head of U.S. equity-derivative trading and convertible arbitrage at Merrill Lynch.
In 2001, he founded the hedge fund Titan Capital Group, where he aimed to profit from unlikely market scenarios by buying out-of-the-money options contracts.
The fund was sued in 2010 by an investor claiming it was misled about Titan’s strategy and risk level. An appeals court dismissed the case in 2012. Titan was also sued by two former employees in 2009 for sexual harassment after Abrams asked them to print topless photos of his wife, according to court documents. A New York court dismissed the complaints in 2011. The fund closed last year, Abrams said.
While it was disappointing to be sued by investors who profited with his fund, Abrams said, he’s satisfied with the court decisions.
His Argentina foray began when he traveled to the country 27 years ago and became enamored with the festive culture and the architecture of Buenos Aires. In 2006, he says he bought real estate in the country.
He started the taxi business two years later and now runs it with a local partner.
“Work is good,” said Alberto Samaniego, who’s been a driver for Abrams’ company for over a year. “I don’t know if he’s a big investor in New York. To me, he’s an easy-going boss who makes sure the cars are in good shape.”