Hedge fund capital invested in emerging markets fell at the end of 2014 from the record level established in Q3 on a combination of performance losses and investor outflows concentrated in funds with exposure to Russia.
The HFRI EM: Russia/Eastern Europe Index declined -18.6 per cent in 4Q14 bringing the 2014 full year loss to -26.5 percent, making 2014 the third worst calendar year decline for the Index. Hedge fund capital invested in Emerging Markets declined by USD1.4 billion in the fourth quarter to conclude 2014 at USD183.8 billion, according to the latest HFR Emerging Markets Hedge Fund Industry Report. For the full year 2014, Emerging Markets hedge fund capital increased by USD13.0 billion on investor inflows of USD3.3 billion.
The volatile HFRI EM: Russia/Eastern Europe Index declined -26.5 per cent for 2014, trailing only the sharp calendar year declines of -59.4 per cent in 2008 and -63.9 per cent in 1998. Recovering strongly in each of the subsequent calendar years following a major sell-off, the HFRI EM: Russia/Eastern Europe Index gained +50.8 and +83.3 per cent in 2009 and 1999, respectively. Since inception in 1995, the Index has posted annualised returns of +11.5percent, nearly identical to the +12.2 per cent annualised gain of Russian equities. Over that time, the HFRI EM: Russia/Eastern Europe Index has annualised volatility of 24.7 percent, approximately half of the 48.6 per cent of Russian equities. Since inception, the HFRI EM: Russia/Eastern Europe Index has led Emerging Markets hedge fund performance, topping the annualised performance of the HFRI Emerging Markets Composite Index by 300 basis points (bps). Total hedge fund capital invested in Russia fell by USD2.8 billion in Q4 and USD4.7 billion for FY 2014, down to USD21.5 billion AUM.
Inflows into Emerging Asia partially offset outflows in Russia/Eastern Europe, with Emerging Asia rising by nearly USD1 billion in 4Q and USD3.5 billion for 2014, bringing total AUM to USD50.5 billion. Hedge fund performance in Emerging Asia was led by the HFRI EM: India Index, which climbed +4.2 per cent for 4Q and +42.7 per cent for 2014, topping Indian equities by 1300 bps for the year. The HFRI EM: China Index was up +4.7 in 4Q but posted a gain of only +5.8 per cent for the FY 2014, trailing the strong gain of Chinese equities.
The HFRI EM: Latin America Index declined -5.9 per cent in 4Q and -9.3 per cent for 2014, the second consecutive calendar year decline and third in the last 4 years. Despite the decline, as a result of the sharp fall in the Brazilian Real, the Index topped the performance of Brazilian equities (denominated in US dollar terms) by over 800 bps in 4Q and 500 bps for FY 2014. Total hedge fund capital managed by Latin American-focused hedge funds declined by USD600 million in 4Q14 but posted a narrow increase for 2014, ending the year at USD10.2 billion AUM.
The HFRI EM: MENA Index also posted as sharp decline in 4Q, falling -8.3 per cent, although this was offset by gains earlier in the year, resulting in a FY 2014 gain of +1.6 per cent. The tepid 2014 performance trailed strong gains of the prior 2 years, in line with the performance of Middle East equities. Approximately 50 hedge funds invest with a dedicated regional focus on the Middle East, managing over USD4 billion in assets.
“Emerging Markets volatility increased sharply into year-end, producing wide performance dispersion across EM hedge funds. With the primary catalysts of sharply falling oil prices, geopolitical tensions and economic sanctions in Russia and weakness in EM currencies driven by gains in US Dollar and Swiss Franc, the top decile of all EM hedge funds gained over 33 per cent for 2014, while the bottom decile declined over 36 percent, resulting in a dispersion of nearly 70 per cent,” says Kenneth J Heinz, President of HFR. “Despite the losses, EM hedge fund investors remained committed to these regions, with total EM capital in aggregate posting a de minimus decline in 4Q, but a meaningful increase for the full year. Sophisticated EM hedge funds which have been positioned for this volatility are likely to drive strong gains in coming months as recent market dislocations normalise and create new opportunities for investors in 2015.”
