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Kenneth J Heinz, President of HFR.

Emerging markets hedge funds reverse September losses with strong October gains

Emerging markets hedge funds posted strong performance gains in October, reversing sharp losses from September as emerging market (EM) economies and assets continue to experience volatility relating to the European sovereign debt crisis.

The HFRX Total Emerging Markets Index gained 4.1 per cent in October following a decline of 5.0 per cent in September; while intra-month volatility was even more pronounced in specific regions, including Latin America and Russia. In response to this volatility, investors hesitated on making new allocations to EM hedge funds, which saw a modest net outflow of USD197 million (0.17 per cent of assets under management in EM funds) for the 3Q11, according to the HFR Emerging Markets Hedge Fund Industry Report, released today by HFR. As a result of September losses, total EM hedge fund assets declined by USD7.2 billion from the record level established at mid-year to end the third quarter at USD115.7 billion.

Net asset flows and asset levels were also only narrowly changed across EM strategies and regions. Investors allocated new capital to EM Event Driven and Relative Value funds, while reducing capital in Equity Hedge and Macro funds. Most regions also showed narrow changes in asset flows over the quarter, with the most significant change being an inflow of $145 million to funds investing across Multiple Emerging Markets. 

Reflecting investor interest in lower equity market correlation, the number of EM hedge funds executing Relative Value and Macro strategies continued to increase.  Nearly 18 per cent of EM hedge funds are Relative Value strategies as of the end of 3Q, utilizing leverage to trade primarily corporate and sovereign fixed income, while over 11 per cent are Macro strategies, trading across asset classes with an emphasis on currency and commodities.

Despite the volatility, EM hedge funds have performed well against local equity and currency markets, which have experienced sharp declines in recent months. The HFRX Latin America Index recovered +5.2 per cent in October after declining 8.5 per cent in September; YTD through October the index has declined less than 7 per cent while the Bovespa has declined 15.8 per cent. Similarly, the HFRX Russia/Eastern Europe Index gained 5.5 per cent in October after a decline of 7.5 per cent in September; for the year, the index has declined 11.0 per cent through October while Russian equity markets have declined more than 12 per cent.

“Emerging market asset volatility has accelerated in recent months in response to external factors and internal EM fundamentals, a trend which is likely to continue to present both opportunities and challenges for hedge funds and investors,” says Kenneth J Heinz (pictured), President of HFR. “Emerging market hedge funds offer sophisticated access to strategies which complement existing EM equity and sovereign fixed income positions with Macro and Arbitrage strategies designed to monetize opportunities in currencies, equities and sovereign bonds, while mitigating certain aspects of directional volatility inherent in emerging market investing.”


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