Hedge fund investors and managers expand reach into emerging markets, says HFR

The number of funds dedicated to investing in emerging markets increasing to more than 950 last year, according to a report from Chicago-based Hedge Fund Research, a provider of hedge fund industry information and performance data.

More than USD9bn in new capital was added to the sector last year, bringing total emerging market assets to more than USD110bn. Overall, HFR says, hedge funds collected USD194bn in net new assets in 2007, bringing total industry assets under management to USD1.87 trillion.

The report says strong interest and performance in underlying markets have fostered growth of funds dedicated to South America, the Middle East and Africa, in addition to continued growth in Russia and eastern Europe as well as emerging Asia.

For the third consecutive year and the fourth year in five, the HFRI Emerging Markets Index was the year's top-performing hedge fund strategy, adding 3.89 percent in the fourth quarter of 2007 for a total of 25.03 per cent over the full year.

However, in January emerging market fund performance declined along with most other markets, with the HFRI Emerging Markets Total Index falling more than five percent, slightly less than the decline of 6.12 percent for the S&P 500 index.

Emerging markets hedge funds are primarily focused on growth-oriented equity investing, though they are expanding to include distressed, relative value arbitrage, quantitative directional and activist strategies.

'The success of emerging markets hedge funds, combined with the recent activity of sovereign wealth funds, is beginning to have a noticeable impact on global capital markets,' says HFR president Kenneth J. Heinz. 'Both have acted as liquidity providers to private corporations looking to strengthen balance sheets in recent months, a trend we expect to continue in 2008.'

Volatility in commodities and foreign exchange has also contributed to the growth in interest in emerging markets exposure among hedge fund investors. Nearly 100 macro funds are focused on emerging markets, using a combination of discretionary and systematic investment processes.

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