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Emerging markets hedge funds post strong gains in 2009

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Hedge funds investing in emerging markets reversed sharp 2008 losses with strong gains in 2009, as the HFRI Emerging Markets (Total) Index gained 40.4 per cent for the year, according to data released by Hedge Fund Research.

This rate of return doubled the overall industry gains as represented by the HFRI Fund Weighted Composite Index, and was led by funds investing in Russia, Latin America and emerging Asia.

Assets invested in emerging markets hedge funds increased by USD25bn during 2009 to over USD93bn, as performance-based gains of USD34.3bn more than offset total investor withdrawals of USD8.5bn.

Withdrawals were significant in the first half of the year, but moderated through mid-year and ended 2009 with a small net inflow of nearly USD400m in the fourth quarter.

Despite the strong gains of 2009, rmerging markets hedge funds remain well below their previous performance peak and still require a gain of 14.6 per cent from year-end level to fully recover from the drawdown of 39.8 per cent which began in 4Q07.

Emerging markets funds ended 2009 with ten consecutive months of positive performance, only to see this streak broken in January 2010 when these funds experienced a loss of 1.24 per cent. Tensions surrounding sovereign credit risk began to mount in 4Q09 and continued through January, contributing to volatility in currencies, commodities and emerging market equities.

Continuing the trend of localisation, the number of emerging markets funds located in China, Russia, India and Australia increased, while the number in the US and UK continued to decline.

The top prime brokers for emerging markets hedge funds remain Morgan Stanley and UBS, with both Credit Suisse and Citibank increasing market share. Similarly, top administrators are Citco and HSBC, with Northern Trust and International Fund Services increasing market share.

“Developments in sovereign bond markets in recent month have reminded investors of the credit risk and volatility inherent in Emerging Markets, and these risks are likely to persist throughout the rest of the year,” says Ken Heinz, president of Hedge Fund Research. “Despite this volatility, investors are allocating to Emerging Markets hedge funds expecting these economies to play a significant role in the ongoing global recovery.”

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