Hedge funds investing in the emerging markets of Russia, Latin America, emerging Asia and the Middle East have produced the strongest year-to-date gains across the hedge fund industry, according to the latest data from Hedge Fund Research.
The HFRI Emerging Markets (Total) Index has gained 9.3 per cent through October, outpacing the 6.8 per cent gain of the broad-based HFRI Fund Weighted Composite Index.
Despite the gains, investors remained cautious on new allocations to emerging markets hedge funds, allocating only USD10m of net new capital to emerging markets funds in 3Q10.
In comparison, investors allocated over USD19bn of new capital to hedge funds focused primarily on developed markets over the same period.
Performance based gains resulted in an asset increase of over USD10bn to emerging markets hedge funds, bringing total AUM in these to nearly USD105bn, the highest AUM level since 2Q08.
Regionally, funds investing in the Middle East and emerging Asia have posted the strongest gains, trailed by Russia and Latin America. The HFRX MENA Index has gained 13.3 per cent and HFRI EM: Asia ex-Japan Index returned 9.5 per cent through October, while the HFRI EM: Russia/Eastern Index and the HFRI EM: Latin America Index have returned 9.5 and 6.7 per cent, respectively.
The trend of emerging market-focused funds locating in the markets in which they invest also continued, with increases in the number of firms locating to Singapore, China and Brazil. At the same time, the percentage of emerging markets firms located in the US and UK continued to decline, falling to less than half of all EM funds.
More than two-thirds of all emerging markets funds are equity hedge strategies, more than double the overall industry average of thirty per cent. Fewer emerging markets funds offer relative value arbitrage or event driven exposure, while the percentage of emerging markets funds focusing on macro strategies is only slightly lower than the overall industry.
Emerging markets fund managers have expanded the number of funds compliant with Ucits III guidelines; in total, more than 120 emerging market hedge funds are presently Ucits III compliant.
“As global investors continue to focus on sovereign credit and currency risks, performance gains in emerging market hedge funds have failed to attract net new investment capital,” says Kenneth Heinz, president of Hedge Fund Research. “However, emerging markets hedge funds offering more strategic exposure, Ucits III conformity and local-market specialisation are likely to appeal to investors as the EU sovereign credit crisis continues.”
