Emerging markets hedge funds extended gains through Q3 2024, as managers positioned portfolios to navigate shifting geopolitical risks, fluctuating interest rates, and global economic uncertainties, according to data from HFR.
The HFRI Emerging Markets: Global Index rose by 9.5% year-to-date (YTD) through August, while the HFRI EM: India Index led the charge with an impressive 15.1% gain over the same period.
According to data released in the latest HFR Asian Hedge Fund Industry Report and HFR Emerging Markets Hedge Fund Industry Report, emerging markets hedge funds outpaced broader industry averages amid shifting economic conditions. The HFRI Emerging Markets (Total) Index, covering all emerging market regions, advanced 5.7% YTD through August. The broader HFRI Fund Weighted Composite Index®, which tracks funds investing in both emerging and developed markets, recorded a 6.8% YTD increase, largely driven by gains in the HFRI Equity Hedge (Total) Index, which jumped 8.8% YTD.
The standout performer was the HFRI EM: India Index, which benefited from easing inflation and improved market sentiment, surging 15.1% in the first eight months of the year. Other regional indices, however, posted more modest gains. The HFRI EM: Latin America Index was up by just 0.6% YTD, while the HFRI EM: China Index and the HFRI EM: MENA Index rose by 1.1% and 1.0%, respectively, as geopolitical tensions weighed on investor confidence in these regions.
Cryptocurrency-focused hedge funds, which have substantial exposure to emerging markets such as Korea, Russia, China, and the Middle East, saw their gains trimmed through mid-year. The HFR Cryptocurrency Index, which had surged 36.3% YTD through May, pared back to an 11.6% gain YTD through August due to increased volatility and market corrections in June and August.
Total assets under management (AUM) in emerging markets hedge funds recorded a modest increase in the second quarter of 2024, reaching $250.5bn – the highest level since the first quarter of 2022. However, the total estimated capital invested in Asian hedge funds declined slightly, dropping from $132.4bn in Q1 2024 to $130.3bn in Q2 2024, signalling some investor caution in the region.
“Emerging and developed markets reached a critical inflection point in the multi-year global interest rate and inflation cycle through mid-2024, with inflation stabilising and central banks reducing interest rates. Despite these positive developments, geopolitical risks remained elevated, creating a complex investment landscape,” said Kenneth J Heinz (pictured), President of HFR. “Emerging markets hedge funds posted mixed gains as managers navigated evolving interest rates, inflation, and geopolitical risks.”
Despite a favourable macroeconomic environment marked by falling inflation and interest rate cuts by central banks in the US and Europe, global geopolitical risks continue to loom large. Ongoing conflicts, such as the war in Ukraine and heightened tensions in the Middle East, have created uncertainty for investors.
Heinz pointed out that the volatile unwind and recovery of the Japanese Yen carry trade, along with continued structural volatility in cryptocurrency markets, have added to the unique set of challenges and opportunities for hedge fund managers. “We expect these risks and uncertainties to persist through the end of the year, prompting global institutions and investors to increase allocations to specialised emerging markets and cryptocurrency hedge funds,” he added.
