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Emerging markets hedge funds surge on vaccine optimism and lockdown easing

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Vaccine optimism and hopes of an end to coronavirus quarantines and lockdowns are spurring growth among emerging markets-focused hedge fund managers, new industry analysis shows.

Hedge Fund Research said on Friday that an upsurge in both performance and capital over the past year have positioned emerging markets managers – and, in particular, those focused on China – for a “strong continuation” of gains in 2021.

EM hedge funds – as measured by HFR’s Emerging Markets (Total) Index – gained 12.7 per cent in 2020. China-focused strategies powered the advance, with the Emerging Markets China Index soaring more than 26.3 percent in the 12-month period between January and December.

At the same time, EM hedge fund capital mushroomed to a new record of USD256.6 billion at the end of 2020, a rise of almost USD5 billion over the previous quarter, driven by gains in EM regional equity markets and surging cryptocurrencies.

Total capital invested in Asian hedge funds increased to USD125.9 billion, while the HFRI Japan Index added 5.9 per cent in Q4, bringing its full-year gains to 11.5 per cent.

HFR president Kenneth Heinz said institutions and investors are continuing to add to their exposures in EM and cryptocurrency hedge funds, positioning for a “continuation of powerful and favourable EM and cryptocurrency trends throughout 2021.” 

Following a tough first half in 2020 across the board, a range of regionally-focused emerging market hedge fund strategies rebounded into positive territory towards the end of last year. Middle East and North Africa focused funds gained more than 6 per cent in Q4, to finish the year up 2.5 per cent, outflanking the narrow decline in Middle East equities.

Similarly, the HFRI EM: Russia/Eastern Europe Index grew 13.5 per cent in Q4 to bring its annual returns to 6.2 per cent, topping the Russian equity slide by over 1650 basis points. Latin America-focused funds surged 13 per cent in Q4, which pared the year-to-date decline to -9.2 per cent, HFR said.

Heinz added: “Emerging markets hedge funds performance and capital surged into 2021 with gains driven by optimism regarding vaccinations globally and improving prospects for a conclusion of the coronavirus pandemic quarantine, while expectations for both economic growth and inflation continued to increase.”

Elsewhere, Heinz noted that a number of managers across EM regions – including Korea, Russia, China and the Middle East – as well as Japan have piled into cryptocurrency strategies in the past year, pushing the HFR Cryptocurrency Index to a near-200 per cent rise in 2020 as many digital currencies hit record values.

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