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HFR - Investor retreat from emerging markets hedge funds accelerates in Q2

Thursday, August 19, 2010

Kenneth J. Heinz
Opalesque Industry Update - Emerging markets (EM) hedge funds experienced a net withdrawal of $1.5 billion in the second quarter of 2010 (2Q10), according to figures released today by Hedge Fund Research (HFR), the leading provider of hedge fund industry data. This represents the second consecutive quarter, and the seventh quarter in the last eight, in which EM hedge funds have experienced a net capital withdrawal. Combining 2Q outflows with performance-based losses, total capital invested in EM hedge funds declined by $3.2 billion, to end the quarter at just under $95 billion.

EM outflows reflect a significant decoupling from the overall hedge fund industry, which experienced a net capital inflow of $9.6 billion for 2Q10, and a first half (1H10) capital inflow of $23 billion. Combined with redemptions in excess of $550 million in 1Q10, investors have withdrawn over $2 billion from EM hedge funds in 1H10.

EM 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, EM funds in Equity Hedge experienced $1.8 billion in redemptions, which was only partially offset by inflows of $320 million to Macro EM funds.

Increased commodity volatility and divergence create challenges
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 YTD through July. As both importers and exporters of individual commodities, most EM 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,” said Kenneth J. Heinz, President of Hedge Fund Research, Inc. “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 EM hedge funds will look to access these trends in coming quarters.” Corporate website: Source

- FG

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