Hedge funds investing in emerging markets concluded 2008 with seven consecutive months of performance declines, resulting in cumulative losses of nearly 37 per cent, according to Chicago-based industry data provider Hedge Fund Research.
This was the worst year of performance since HFR began tracking emerging markets-focused funds in 1990, eclipsing the previous record decline of nearly 33 per cent in 1998.
Investors withdrew USD6.7bn from emerging markets hedge funds in the fourth quarter of 2008, with total hedge fund capital committed to emerging markets falling to less than USD67bn globally. This represents an asset decline in 2008 of nearly 43 per cent from a peak at the end of 2007.
Emerging markets hedge funds have been a top-performing strategy in six out of the past 11 years, an average performer in two of those years, and a near-worst performer in three years. The strategy characteristically experiences sharp recoveries after declines, with an average gain of over 23 per cent in the 12 months following the five largest historical declines.
'Performance of emerging markets hedge funds has historically been characterised by cyclical extremes relative to the rest of the hedge fund industry,' says HFR president Kenneth J. Heinz.
'Investors who have endured the volatility have realised an average gain of nearly 13 per cent annually since 1990, with volatility similar to that of the S&P 500, which has returned 7.3 per cent annually over the same period.'
Despite last year's losses, hedge fund capital invested in the Middle East and Africa has grown from less than one half of a per cent of emerging markets hedge fund capital in 2002 to more than two per cent, or nearly USD1.5bn of invested assets.
More than 20 funds have an exclusive focus on investing in the region, and are located in these markets while also attracting investors globally. These funds have an average asset size of nearly USD75m, second in average size only to Russia among emerging markets hedge funds.
Hedge funds investing in Latin America posted losses of 29.1 per cent for 2008, the smallest decline of any of the four major emerging markets regions. More than 100 funds focus on investing exclusively in Latin American markets, with an average fund size of just over USD35m, the smallest of the four regions surveyed by HFR. These funds comprise more than five per cent of total emerging markets hedge fund capital, up from three per cent in 2002.
Funds investing in most volatile of all emerging markets regions, Russia and Eastern Europe, have realised an cumulative gain exceeding 47 per cent over the past five years, despite losses exceeding 57 per cent in 2008. More than 160 hedge funds invest with a dedicated Russia/Eastern Europe focus, with an average fund size approaching USD100m.
Funds investing in emerging Asia saw declines of approximately 33.5 per cent last year, but this area led other emerging markets regions with a gain over 3 per cent in December. Emerging Asia is also the only region to post positive performance over the past three years, gaining 13.9 per cent cumulatively and 4.4 per cent annualised over that period.
Some 460 hedge funds, or 45 per cent of emerging markets hedge funds, invest with an exclusive and dedicated focus on emerging Asia, with an average fund size of nearly USD60m.
Founded in 1993, HFR Group is a provider of hedge fund data, research, indexation and asset management products and services, including the HFRI and HFRX indices of hedge fund industry performance.