3 Dec 2010
Hedge funds investing in the high-growth emerging markets of Russia, Latin America, Emerging Asia and the Middle East have produced the strongest YTD gains across the hedge fund industry, according to the latest data from Hedge Fund Research, Inc., which has released the HFR 3Q Emerging Markets Industry Report. The HFRI Emerging Markets (Total) Index has gained +9.3% through October, outpacing the +6.8% gain of the broad-based HFRI Fund Weighted Composite Index.
Despite the gains, investors remained cautious on new allocations to Emerging Markets hedge funds, allocating only $10 Million of net new capital to EM funds in 3Q10. In comparison, investors allocated over $19 Billion of new capital to hedge funds focused primarily on developed markets over the same period. Performance based gains resulted in an asset increase of over $10 Billion to EM hedge funds, bringing total AUM in these to nearly $105 Billion, the highest AUM level since 2Q08.
Regionally, funds investing in the Middle East and Emerging Asia have posted the strongest gains, trailed by Russia and Latin America. The HFRX MENA Index has gained +13.3% and HFRI EM: Asia ex-Japan Index returned +9.5% through October, while the HFRI EM: Russia/Eastern Index and the HFRI EM: Latin America Index have returned +9.5% and +6.7%, respectively.
Trends toward localization, secular growth and UCITS III pervasive in EM
The trend of Emerging Market-focused funds locating in the markets in which they invest also continued, with increases in the number of firms locating to Singapore, China and Brazil. At the same time, the percentage of EM firms located in the U.S. and UK continued to decline, falling to less than half of all EM funds.
More than two-thirds of all Emerging Markets funds are Equity Hedge strategies, more than double the overall industry average of thirty percent. Fewer EM funds offer Relative Value Arbitrage or Event Driven exposure, while the percentage of EM funds focusing on Macro strategies is only slightly lower than the overall industry. EM fund managers have expanded the number of funds compliant with UCITS III guidelines; in total, more than 120 Emerging Market hedge funds are presently UCITS III compliant.
Despite the gains, investors remained cautious on new allocations to Emerging Markets hedge funds, allocating only $10 Million of net new capital to EM funds in 3Q10. In comparison, investors allocated over $19 Billion of new capital to hedge funds focused primarily on developed markets over the same period. Performance based gains resulted in an asset increase of over $10 Billion to EM hedge funds, bringing total AUM in these to nearly $105 Billion, the highest AUM level since 2Q08.
Regionally, funds investing in the Middle East and Emerging Asia have posted the strongest gains, trailed by Russia and Latin America. The HFRX MENA Index has gained +13.3% and HFRI EM: Asia ex-Japan Index returned +9.5% through October, while the HFRI EM: Russia/Eastern Index and the HFRI EM: Latin America Index have returned +9.5% and +6.7%, respectively.
Trends toward localization, secular growth and UCITS III pervasive in EM
The trend of Emerging Market-focused funds locating in the markets in which they invest also continued, with increases in the number of firms locating to Singapore, China and Brazil. At the same time, the percentage of EM firms located in the U.S. and UK continued to decline, falling to less than half of all EM funds.
More than two-thirds of all Emerging Markets funds are Equity Hedge strategies, more than double the overall industry average of thirty percent. Fewer EM funds offer Relative Value Arbitrage or Event Driven exposure, while the percentage of EM funds focusing on Macro strategies is only slightly lower than the overall industry. EM fund managers have expanded the number of funds compliant with UCITS III guidelines; in total, more than 120 Emerging Market hedge funds are presently UCITS III compliant.
“As global investors continue to focus on sovereign credit and currency risks, performance gains in Emerging Market hedge funds have failed to attract net new investment capital,” said Kenneth Heinz, president of Hedge Fund Research, Inc. “However, emerging markets hedge funds offering more strategic exposure, UCITS III conformity and local-market specialization are likely to appeal to investors as the EU sovereign credit crisis continues.”
