Fir Tree Partners liquidated its Argentina Fund last month after generating 20% in annualized net returns for investors, according to Bloomberg based on information from people with knowledge about the situation.

Market observers said that the decision of the hedge fund to cash out is a signal that the biggest gains in Argentina were over. Fir Tree Partners created its Argentina Fund in April 2013; approximately six months after the United States Court of Appeals upheld the order to prohibit Argentina from making payments on restructured bonds not until it settled all of its holdouts with hedge funds led by Elliott Management.  The hedge funds won the right to a full payment.

Fir Tree Calls Argentina 'Crowded Trade', Liquidates The Fund

Over-crowded trade

At the time, the bond prices were close to four-year lows. Since Fir Tree launched its Argentina Fund, its assets peaked at $400 million and the country’s benchmark notes due 2033 climbed 54%.  Analysts suggested that investments Argentina bonds are over-crowded and the rally already reached its peak.

There is an increased speculation that Argentina will be able to resolve its decade long-dispute once a bond clause preventing a settlement expires on December 31 and a new president is elected.

Fir Tree Partners seemed unconvinced that Argentina will reach a settlement agreement soon, according to Alejo Acosta, a strategist at Puente. He said,

“It’s simply a matter of risk-reward [for Fir Tree]. The feeling is that a big chunk of the rally has already taken place and what’s left is an overcrowded trade.”

Argentina to start negotiations in 2015

It had been reported that Argentina and the hedge funds will start their negotiations to settle the debt dispute in 2015.

In an e-mailed statement to Bloomberg, Joe Petraccaro, vice president of institutional trading at Arca Capital Investments commented, “You know that 2015 is going to be a very bumpy ride in Argentina with the holdouts and the upcoming elections. There’s a lot of uncertainty and risk ahead, so it would be wise for a fund to cash out.

On the other hand, Jane Brauer, a strategist at Bank of America Corp (NYSE:BAC) commented the risk of losses from Argentina bonds increases if both parties fail to reach a resolution immediately and investors try to cash out at the same time.

“The sooner a deal gets done, the faster they can move on to some other strategy. The biggest risk for them is it takes even longer than people are anticipating and there’s deterioration in the economy so bad that even if a new government restructures, the exit prices are low,” said Brauer.

In July, Argentina defaulted one class of bonds for the second time after failing to reach a deal with the hedge funds. The nation’s Economic Minister Axel Kicillof previously stated they still have access to the international debt market and more than a dozen private investors are still willing to provide financing. He also pointed out, “The problem is not Argentina. It is not us. It is the vulture funds.”