Emerging markets hedge funds surge as equities gain through global pandemic

Global volatility

Emerging Markets and Asian hedge funds surged in Q2 2020, recovering from steep losses experienced in late 1Q, with many indices posting gains for YTD 2020 through July. 

The HFRI China Index gained 6.8 per cent in July, which followed a 14.5 per cent gain in Q2, the best quarterly performance since Q1 2019, to bring YTD performance to +13.1 per cent, as reported in the HFR Asian Hedge Fund Industry Report and the HFR Emerging Markets Hedge Fund Industry Report.

Hedge fund capital invested in Emerging Markets also surged concurrent with the record performance gains, ending Q2 at USD244.4 billion (CNY1.55 trillion, BRL1.24 trillion, INR16.6  trillion, RUB16.9 trillion, SAR842 billion), an increase of nearly USD13 billion from the prior quarter. Hedge fund capital invested in Asian markets also increased to USD115.5 billion (CNY798 billion, INR8.57 trillion, JPY12.28 trillion, KRW1.09 trillion).

The HFRI Emerging Markets (Total) Index advanced 12.8 per cent in Q2, the strongest quarterly gain since Q4 2001, followed by a 4.5 per cent gain in July, bringing YTD performance to essentially flat for the year. Hedge funds across all EM regions posted similar strong gains in Q2, with the HFRI EM: Russia/Eastern Europe Index surging 15.1 per cent, while the HFRI EM: Latin America Index advanced 13.6 per cent and the HFRI EM: MENA Index added 4.9 per cent in the quarter. Through July, hedge funds investing in Russia have outperformed Russian equities by 1700 bps while LatAm-focused funds have outperformed LatAm equities by 1400 bps.

The HFRI Fund Weighted Composite Index, the global benchmark for funds investing across all regions and strategies, has gained 12.3 per cent over the last four months (April – July), nearly recovering the entire 1Q decline of -11.6 per cent. Similarly, the investable HFRI 500 Fund Weighted Composite Index has gained 10.8 per cent over the last four months (April – July), bringing YTD performance to a narrow decline of 0.2 per cent. The HFRI Asia w/Japan Index gained 2.9 per cent in July to increase the YTD return to +0.9 per cent.

Currency-focused strategies have produced strong gains through the pandemic, driven by recent declines in the US dollar against both EM and developed currencies, with the HFRI Currency Index gaining 6.2 per cent YTD through July.

Cryptocurrency-focused hedge funds have also surged in recent months, with cryptocurrency exposure contributing to recent gains in EM-focused funds. The HFR Blockchain Index surged +26.8 per cent in July, bringing YTD performance to +47.8 percent, while the HFR Cryptocurrency Index jumped +30.6 in July, bringing YTD performance to +51.4 percent.

“Emerging Markets hedge funds have navigated the pandemic volatility in recent months, with gains across regional equities, currencies and commodities narrowing or entirely offsetting early 2020 losses as the coronavirus pandemic was beginning its impact on the global economy,” says Kenneth J Heinz, President of HFR. “The macro and geopolitical environment has shifted and evolved into the second half of the year, with ongoing risk continuing, associated with the global pandemic, as well as with regard to global stimulus and recovery efforts, ongoing trade tensions and the uncertainty of the US election. EM & Asian hedge funds that are positioned for this fluid environment and which have demonstrated performance generation in recent months are likely to lead industry performance and attract institutional investors.”