Emerging market hedge funds close turbulent decade with strong gains

Stormy skies

– HFRI’s EM Index up 11.67 per cent in 2019, as market conditions hint at positive start to new year –

Emerging markets-focused hedge funds rounded off a strong year with a 3.58 per cent monthly advance in December, to take their composite returns for 2019 to almost 12 per cent, new performance data from HFR shows.

The HFRI Emerging Markets (Total) Index, which tracks strategy performance across all regions, gained 11.67 per cent for the year, an impressive reversal of fortunes for EM hedge funds following their 10.94 per cent annual slide in 2018.

Funds trading Russia and Eastern European markets led the pack, with Hedge Fund Research’s EM Russia/Eastern Europe Index up 24.52 per cent for the year. Its China-focused fund index rose 19.46 per cent over the 12-month period, while Asia ex-Japan advanced 12.42 per cent. Funds focused on Latin America also notched up an annual double-digit return, growing 10.68 per cent. Only India-focused hedge funds suffered a down year, sliding 1.24 per cent.

Overall, HFRI’s 2019 performance data suggests hedge funds across all strategy types experienced their strongest year since 2009, during the midst of the Global Financial Crisis.

The EM indices underline a positive ending to a turbulent decade in emerging markets, which was characterised by the 2011 Arab Spring, the EM stock market crash of 2013, Russia’s annexation of Crimea in 2014 and, more recently, the currency crises in Turkey and Argentina in 2018.

More recently, conditions for emerging markets have been bolstered by interest rate cuts in Brazil and Turkey, two key emerging market economies, while the protracted tariff war between the US and China appears to be on the road to resolution. A potential new deal has been floated to increase Chinese purchases of agricultural products in return for the US withdrawing from raising additional tariffs.

EM managers now believe the asset class now appears to be on a surer footing heading into the new decade.

“We believe there will of course be the usual twists and turns in the plot line, but the broad narrative above appears to be one in which investors will turn to carry assets and seek value in higher-yielding stories,”  Anthony Kettle, senior portfolio, emerging markets at BlueBay Asset Management in London, observed in a recent market commentary. “EM seems set to enjoy a nice start to the year before investors turn their attention ahead to the US presidential elections, which loom as the largest risk event for 2020.”