EM hedge funds hit new record assets, and divergent fortunes in markets

Continuing investor appetite for emerging markets helped hedge funds focused on them hit new high assets of $123bn last quarter, after four consecutive quarters of net inflows.

Allocators to strategies that could invest both in and beyond EMs, and chose portfolios more focused on growth markets, were rewarded by better returns last quarter.

Global macro funds focused on EMs registered healthy 9% gains last quarter, some 11 percentage points more than the result from macro managers focused on the stagnating advanced economies and their generally falling capital markets, according to Chicago-based data providers Hedge Fund Research.

Investor appetite for emerging markets generally helped fuel $300m inflows into EM hedge funds in the three months to June. The sector made $1.1bn of performance gains.

HFR said these occurred “against a backdrop of increasing structural divergence between developed and emerging markets”.

But EMs also dealt out disappointment to some hedge managers in equal measure last quarter, as EM hedge fund liquidations accounted for 16% of all industry fund closures. That said, EM launches accounted for over 10% of global industry start-ups.

HFR said contributing factors to the popularity of EM funds among investors included the ongoing European sovereign debt crisis, debate regarding extending the US debt ceiling, and deterioration in the robustness of the US economic recovery.

But overall performance for the strategy was dead flat for the first two quarters of 2011.

HFR said: “Positive contributions from EM exposure in funds investing in Russia and Latin America have been offset by emerging Asia and Latin America. The Russia index gained 3.6% through July, while the HFRI EM Asia (ex-Japan) index posted a decline of 1.9%.

“Through mid-year 2011, the decoupling and divergence of EM from their developed market counterparts have become increasingly evident and significant, and can be seen across currencies, sovereign debt, and different types of hedge fund exposure,” said Ken Heinz, HFR president.

“As risk aversion has increased through mid-2011, investors are increasingly looking to EM hedge funds not only for continued secular economic growth, but also for tactical exposure to macroeconomic trends, currency stability, and hedged, uncorrelated exposure to developed market equities.”

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