New asset highs for emerging markets hedge funds fuel allocator scepticism

Hedge funds active in emerging markets posted new all-time high assets in the first quarter, but some allocators are increasing hunts for advanced markets products instead, after the rush of money towards developing markets.

Data providers Hedge Fund Research said emerging markets hedge funds now hold $121bn, surpassing the old high of $117bn set in 2007.

The funds took in nearly $2.3bn in the first quarter alone, and along with $5.1bn in performance gains they boosted their assets by about 6.5%.

Their inflows in the first quarter – the largest recorded since at least the first quarter of 2008 – more than offset the combined $1.6bn outflows last year, and dwarfed the aggregate $553m inflows over the previous six months.

Not all allocators, however, express interest in only increasing exposure.

Chris Jones, CIO at fund of hedge funds Key Asset Management, said recently Key had been looking for global macro managers with less developing markets exposure, and moved from some it felt had taken on too much.

Jones is one of many people expressing some concern at a strong preference among investors and traders for emerging markets.

Morgan Stanley published a note last week addressing concerns a credit bubble was forming in emerging markets.

Although the bank concluded the risks of this were “typically small” and credit issues “manageable”, the bank’s global economics team said: “If the inflation-growth mix were to turn adverse, credit growth would start to look more out of synch with fundamentals, pushing non-performing loans higher and increasing the prospect of a hard landing.”

For elevated risk of a credit bubble, the bank cautioned about China, India, Brazil, Russia, Turkey, and Indonesia. Lower risks are in South Africa, and South Korea.

Jones said: “The Holy Grail is non-EM global macro trading. A lot of global macro talent is now focused on emerging markets, but we may want to take the emerging markets risk through equity long/short. One problem with emerging markets is, there is not a lot of ‘long/short’ going on.”

From recent year-end lows in 2008, emerging markets hedge fund assets jumped 80% from $67.5bn, whereas the total industry assets grew 43%, from $1.41trn to $2trn.

Emerging Asia and Russia were the most popular hedge fund geographies recently.

The developing market sector of the industry continued to exhibit volatile performance. Overall it rose 0.96% this year to 31 March, then 1.83% in April. But these averages masked wide differences in sub-sectors.

Funds focused on Latin America rose about 15% in the first quarter; Russia and Eastern Europe rose 8.22% to April; and managers focused on the Middle East fell 4.34% over the first quarter, before rebounding 1.4% in April.

“The record level of assets invested in emerging market hedge funds represents the latest evidence that global investors continue to exhibit a preference for accessing specialized emerging markets exposure via hedge funds,” said Kenneth Heinz, HFR president.

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