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Investors continue retreat from emerging markets hedge funds

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Emerging markets hedge funds experienced a net withdrawal of USD1.5bn in the second quarter of 2010, according to figures released by Hedge Fund Research, a provider of hedge fund industry data. 

This represents the second consecutive quarter, and the seventh quarter in the last eight, in which emerging markets hedge funds have experienced a net capital withdrawal.

Combining Q2 outflows with performance-based losses, total capital invested in emerging markets hedge funds declined by USD3.2bn, to end the quarter at just under USD95bn.

Emerging markets outflows reflect a significant decoupling from the overall hedge fund industry, which experienced a net capital inflow of USD9.6bn for Q2 2010, and a first half capital inflow of USD23bn. Combined with redemptions in excess of USD550m in Q1 2010, investors have withdrawn over USD2bn from emerging markets hedge funds in the first half of 2010.

Emerging markets outflows were region-specific during the period: investors allocated new capital to hedge funds focusing on Latin America and the Middle East, while redemptions were concentrated in Russia and emerging Asia. By investment strategy, emerging markets funds in equity hedge experienced USD1.8bn in redemptions, which was only partially offset by inflows of USD320mto macro emerging markets funds.

The performance of commodity-focused hedge funds has also been adversely impacted by recent commodity market volatility, with the HFRX Commodity Index down 5.6 percent year-to-date through July. As both importers and exporters of individual commodities, most emerging markets economies maintain characteristic sensitivities to commodity price movements which can be detrimental, beneficial or variable, depending on the specific economy and price movement. Despite broad divergences across different commodity markets, hedge funds focused on metals, agricultural and energy commodities have all experienced negative performance YTD 2010.

“Changes in global growth expectations, prospective currency volatility and commodity-specific market influences have resulted in a near term decrease in investor risk tolerance for emerging market hedge fund exposure,” says Kenneth J. Heinz, president of Hedge Fund Research. “While many of these risks have persisted into 3Q10, many powerful trends in EM equities, sovereign credits and commodities have also reversed; hedge fund investors considering the tactical, cyclical and overall positive performance dynamics of emerging markets hedge funds will look to access these trends in coming quarters.”

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