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Emerging Markets the darling of hedge fund industry as managers send them record $121bn

Friday, June 03, 2011
Opalesque Industry Update - Hedge funds have reached a new record in assets allocated to the new darling markets of the financial world: emerging markets. With over $121bn surging into these financial markets from hedge funds alone, managers have surpassed the previous $117bn record that was set in 2007 as the financial crisis hit the developed world.

With returns that have managed to navigate hiccups through certain emerging markets (the political unrest in the Middle East and inflation-sensitive declines in emerging Asia), HFRI has reported that its Emerging Markets Index stands at +2.80% YTD (through April) with Russia/Eastern Europe funds returning an impressive +8.22% YTD (through April). Middle East specific funds have struggled with the HFRX MENA Index falling for most of the year before an April rebound curbed those losses to approximately 3%.

“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,” commented Kenneth J Heinz, President of Hedge Fund Research, in a statement released by the firm. Heinz said that the number of funds in Brazil, China, Russia, Singapore and the UAE continue to grow at a strong pace, which is a trend the research firm expects to continue for the foreseeable future.

While emerging markets are seeing a flood of dollars, as investors for the first time look to diversify out of developed markets in a reverse “flight to safety” as those countries stumble in their financial recovery, the real threat for emerging markets is quickly becoming inflation. “If left unchecked, high and accelerating inflation will have growing adverse economic, social and political effects. In addition to undermining overall growth and resource allocation, it imposes a very heavy burden on the poor and erodes political unity,” wrote PIMCO’s Mohamed A. El-Erian in a commentary published this week. (Source)

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