Emerging markets (EM) hedge funds ended the third quarter at a new record asset level, eclipsing the prior record from Q2 2015, according to the latest HFR Emerging Markets Hedge Fund Industry Report.
Assets dedicated to EM hedge funds increased to USD199.66 billion in Q3, up USD9.8 billion from the prior quarter as a result of strong performance-based quarterly gains and despite a net investor outflow of USD850 million.
The HFRI Emerging Markets (Total) Index gained 5.06 per cent in Q3 and added 1.10 per cent in October, led by regional exposures to Latin America, Russia, and Emerging Asia; the HFRI EM Index is up 9.1 per cent YTD through October.
Hedge funds focused on Latin America extended the powerful YTD surge, leading all areas of hedge fund performance through October. The HFRI EM: Latin America Index vaulted 6.2 per cent in Q3, and added another 5.4 per cent in October, bringing YTD performance to +33.0 per cent. Recent gains for the volatile LatAm Index follow performance declines in four of the last five years, including the last three. The total number of hedge funds focused solely on investing in Latin America remained at 107, while total capital increased to USD6.7 billion in Q3.
Hedge funds investing in Russia and Eastern Europe also posted strong gains, with the HFRI EM: Russia/Eastern Europe Index gaining 6.5 per cent in Q3 2016 and 1.0 per cent in October, increasing YTD performance to +20.7 per cent, driven by gains in both Russian equities and the Rouble. As of Q3, over 170 hedge funds were regionally focused on Russia/Eastern Europe, with these managing an estimated USD28.9 billion.
Emerging Asia performance was led by the HFRI China Index, which advanced 7.3 per cent in Q3, fully erasing the decline from the first half of the year to post a narrow gain through Q3. The HFRI China Index topped the Shanghai Composite Index by over 480 bps in the third quarter, and by over 1,500 bps YTD through Q3. The HFRI India Index jumped 7.6 per cent in Q3 and added 1.3 per cent in October, bringing YTD performance to 7.8 per cent. Total hedge fund capital invested in Emerging Asia increased to USD50.6 billion in Q3, as over 520 funds remain focused on the region.
The only regional area of EM performance to suffer a decline in Q3 was the Middle East, as the HFRI MENA Index fell 0.5 per cent in the quarter before rebounding 2.0 per cent in October, settling YTD performance at -4.7 per cent thus far in 2016. An estimated 50 hedge funds are currently focusing their exposures in the MENA region, with total capital at approximately USD4.3 billion.
“Emerging market hedge fund capital increased to a record level in Q3 as currency, fixed income and commodity markets adjusted to the impacts of shifting trade and monetary policies from both Brexit and the US election,” says Kenneth J Heinz, president of HFR. “As regional EM equity markets have surged, EM hedge funds have effectively complemented these directional gains and mitigated risks with tactical, non-directional trades created by shifting policies and temporary dislocations. The coming period of US and UK trade and monetary policy adjustments are likely to produce compelling opportunities for EM hedge funds, extending their performance leadership and capital expansion into 2017.”