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Emerging market hedge funds reach record capital levels

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HFR reports that total capital invested in Emerging Markets (EM) hedge funds climbed to a record level to begin 2017, as energy commodities and the US dollar posted strong gains. Assets dedicated to EM funds increased to USD200.7 billion (1.38 trillion RMB, 622 billion Brazilian Real, 13.4 trillion Indian Rupee, 11.6 trillion Russian Rouble, 753 billion Saudi Real) to end 4Q16.

For FY 2016, EM hedge fund capital increased by USD9.3 billion, despite net investor outflows of USD4.8 billion. As previously reported by HFR, total hedge fund assets globally increased by USD121.6 billion in 2016, ending the year at USD3.02 trillion, also representing the second consecutive quarterly record for industry capital.

Led by hedge funds investing in Latin America and Russia, EM posted gains in 10 of the past 11 months through January 2017, recovering from sharp declines in early 2016. The HFRI Emerging Markets (Total) Index gained +3.2 per cent in January, following a +7.0 per cent gain in 2016.

The HFRI EM: Latin America Index surged +5.6 per cent in January, extending the industry-leading gain of +27.2 per cent from 2016. Strong gains for the Index follow three years of volatile performance, culminating with the Index declining -20.9 per cent in 2015. Total capital invested in Latin American-focused hedge funds increased to USD6.3 billion in 2016, managed by over 100 funds.

Hedge funds investing in Russia and Eastern Europe also led industry performance in 2016, as the HFRI EM: Russia/Eastern Europe Index advanced +26.8 per cent for the year and added +3.2 per cent in January 2017. Total capital invested in Russian/Eastern European-focused funds increased by USD2.5 billion in 2016 to USD29.3 billion, managed by over 170 hedge funds.

Emerging Asia also advanced to begin 2017 after posting a narrow gain in 2016, strongly outperforming the decline of Chinese equities for the year. The HFRI EM: Asia ex-Japan Index surged +3.7 per cent in January, topping the +1.8 per cent return of the Shanghai Composite Index. For FY 2016, the HFRI EM: Asia ex-Japan Index was nearly unchanged, posting only a narrow gain of +0.05 per cent, though recovering from a steep drawdown of -9.7 per cent in the first two months of year and outperforming the Shanghai Composite Index by over 1200 basis points.  Total capital invested in Emerging Asia funds declined by USD4.4 billion for 2016 to USD48.6 billion, managed by over 500 hedge funds.
Hedge funds invested in the Middle East also gained to begin 2017, with the HFRI EM: MENA Index rising +1.2 per cent in January. The Index declined -4.0 per cent for 2016, though narrowed the decline throughout the year after a drawdown of nearly -7.0 per cent in the first two months of the year. Total capital invested in Middle East-focused hedge funds increased USD500 million in 2016, with nearly 50 funds managing USD4.6 billion in capital.
“Expectations for trade and immigration policy adjustment accelerated to begin 2017 as hedge fund capital invested in Emerging Markets set a second consecutive quarterly record and surpassed the USD200 billion milestone for the first time,” says Kenneth J. Heinz (pictured), President of HFR. “Strong performance gains, specifically focused in Latin America and Russia/Eastern Europe, contributed to this growth, as investors positioned for the impacts of divergent monetary policies in US & Europe on Emerging Markets. Specialized hedge funds which have demonstrated the ability to navigate these trends are likely to continue to lead industry gains in 1H17.”

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