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EM hedge fund assets notch new record despite cautious sentiment, tepid inflows

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Total capital invested in Emerging Market-focused hedge funds increased by USD1.4 billion during the second quarter, including new capital inflows of over USD300 million and performance-based returns of USD1.1 billion, according to data released today by HFR (Hedge Fund Research, Inc).

The second quarter represents the fourth consecutive positive quarterly inflow as well as the fourth consecutive quarterly increase in overall Emerging Markets (EM) hedge fund assets, and brings total assets invested in EM hedge funds to USD123 billion, a new record.

Recent inflows have occurred against a backdrop of increasing structural divergence between developed and emerging markets. Contributing factors include the ongoing European sovereign debt crisis, the debate regarding the extension of the U.S. debt ceiling, and deterioration in the robustness of the U.S. economic recovery.  In contrast to these issues facing the developed world, many Emerging Market economies have exhibited resilience so far this year, and have been the beneficiaries of strong currencies and sovereign debt positions, even with continued evidence of increasing inflationary pressures. In this environment, Macro hedge funds focused on Emerging Markets have effectively navigated this volatility, with EM Macro funds posting a performance based gain of approximately 9 per cent for 2Q; this contrasts with globally- focused Macro hedge funds, which posted performance declines of -1.67 per cent for 2Q and -0.21 per cent year-to-date. EM Relative Value Arbitrage funds posted a performance based gain of USD1.2 billion in 2Q, which  partially offset a performance-based decline of USD2.1 billion in EM Equity Hedge.

Overall Emerging Market hedge fund performance was muted through the first two quarters of the year, with the HFRI Emerging Markets (Total) Index essentially flat (0.0%) while the HFRX Total Emerging Markets Index gained +0.67%, both through July. Positive contributions from EM exposure in funds investing in Russia and Latin America has been offset by Emerging Asia and Latin America, the HFRI EM: Russia Index gained +3.6 per cent through July, while the HFRI: EM Asia (ex-Japan) Index has posted a decline of -1.9 per cent. While the number of EM hedge funds globally remained relatively constant at just over 1,000 as of the end of 2Q, EM hedge funds represented over 10 per cent of global hedge fund launches and over 16 per cent of liquidations in the most recent quarter.

“Through mid-year 2011, the decoupling and divergence of Emerging Markets from their developed market counterparts has become increasingly evident and significant, and can be seen across currencies, sovereign debt, and different types of hedge fund exposure,” says Kenneth J Heinz (pictured), President of HFR. “As risk aversion has increased through mid-2011, investors are increasingly looking to Emerging Market hedge funds not only for continued secular economic growth, but also for tactical exposure to macroeconomic trends, currency stability, and hedged, uncorrelated exposure to developed market equities. A likely continuation of these trends will drive capital growth in EM hedge funds in the second half of 2011.”
 

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