Emerging Market hedge funds posted strong performance gains in October, driven by exposure to China and Russia, as risk tolerance and liquidity returned to emerging equity markets, with the HFRI Emerging Markets Index up +3.4 per cent.
That was the index’s first positive monthly performance since April, according to the latest HFR Emerging Markets Hedge Fund Industry Report.
Total hedge fund capital invested in emerging markets fell by over USD11 billion in 3Q, down from the mid-year record level, to USD187 billion (RMB 1.19 trillion, 12.2 trillion Russian Ruble, 716 billion Brazilian Real, 701 billion Saudi Riyal, 12.3 trillion Indian Rupee), as investors redeemed USD2.5 billion, and EM funds declined nearly USD10 billion on performance-based losses in the quarter.
October performance was led by hedge funds investing in China, with the HFRI China Index gaining +5.9 per cent, the strongest monthly performance since the Index surged +14.2 per cent in April. As a testament to the regional exposure volatility, the Index fell by -18.7 per cent between June and August, a time period over which the Shanghai Composite declined approximately -30 percent; YTD through October, the HFRI China Index has added +6.0 per cent. Total hedge fund capital invested in China fell by USD5.6 billion in 3Q, ending the quarter at USD51.1 billion (RMB 325 Billion), and representing the largest quarterly asset decline since 4Q08.
Hedge funds investing in Russia led EM performance in October, as the HFRI EM: Russia/ Eastern Europe Index advanced +4.8 per cent. With the October gains, the Index ended a five-month performance drawdown in which it fell by -8.8 per cent, while Russian equities declined by over -20 per cent during the same period. As a result of early year gains, Russian hedge funds have climbed +8.4 per cent YTD through October, leading all EM regions. Total hedge fund capital invested in Russia fell to USD25 billion (Roubles 1.6 Trillion) in 3Q, a decline of USD2 billion over the prior quarter.
Latin American-focused hedge funds also advanced in October, with the HFRI EM: Latin America Index gaining +3.6 per cent. As a result of a -19.0 per cent drawdown over the previous five months, the Index remains down -17.9 per cent YTD, although outperforming the significant YTD decline of -36.9 per cent for the Bovespa. Total capital invested in Latin American hedge funds fell to USD7.4 billion (Real 28.3 billion) in 3Q, the lowest level since 2010.
Diverging from other EM hedge fund exposure, funds focused on the Middle East posted more narrow performance declines in 3Q, though these funds extended, rather than reversed, losses last month, as the HFRI MENA Index fell -2.1 per cent in October, lowering YTD performance to -6.6 per cent. MENA-focused hedge fund capital fell below USD4 billion (Saudi Real 15 billion) for the first time since 2013.
“Emerging Market hedge fund performance reached a critical inflection point to conclude the third quarter, as the relative divergence between favourable investor sentiment towards developed markets and a pessimistic outlook towards emerging markets reached extreme levels, and October performance reflected only the beginning of a convergence between expectations for emerging and developed markets,” says Kenneth J Heinz (pictured), President of HFR. “While the outlook for hedge fund exposure globally has improved as a result of expectations for higher US interest rates, the outlook for EM hedge fund exposure is likely to improve significantly into year-end as a result of stabilising currency and energy markets, increased developed market demand, improved investor risk tolerance and moderate inflationary pressure. The combined effect of these is likely to extend recent EM hedge fund gains through year-end and into early 2016.”
