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The total number of EM hedge funds increased to 1,073 funds, approximately 14 percent of all hedge funds and an increase of 3.5 percent since 2Q11.

Despite the increase in the number of funds, total EM hedge fund assets declined by 3 percent from the 1Q12 record, falling by $3.7 billion to finish 2Q12 at $123.5 billion. This AUM decline was primarily performance-based as the HFRI Emerging Markets Total Index declined by -6.05 percent for the quarter, offsetting gains from 1Q12. Investors also withdrew a modest $256 million in 2Q, or approximately 0.2 percent of total EM hedge fund assets.

Despite both Euro-centric and local market volatility in 2Q12, EM hedge funds continue to exhibit strong performance dynamics, both relative and absolute, through the first seven months of 2012. Across EM regions, funds investing Latin America have posted the strongest gains, with the HFRI EM: Latin America Index gaining +3.9 percent YTD through July, topping a decline in the Bovespa Index over the same period. Similarly, the HFRX Russia/Eastern Europe Index posted a gain of +2.3 percent YTD through July, also topping a decline in Russian equities. The HFRX MENA Index produced a gain of +2.7 percent YTD through July, generally in line with regional MENA equity markets. HFR recently announced the launch of the HFRX Emerging Markets Index, which includes exposure across all EM regions and hedge fund strategies; the Index provides daily performance transparency and has posted a gain of over +5.7 percent YTD through August 17.

While EM hedge fund capital continues to be predominantly focused on Fundamental Growth strategies, the industry continues to evolve with new offerings focused on Currency, Fixed Income and more sophisticated Equity Hedge (EH) strategies. Macro hedge fund strategies, which include both Discretionary and Quantitative/Systematic CTA strategies have increased in number to the point where they now account for nearly 13 percent of all EM hedge funds, an increase of nearly 2 percent over YE 2011.

Capital invested in fixed income based Relative Value Arbitrage strategies has also grown to nearly 10 percent of all EM hedge fund capital, with increases across both FI: Sovereign and FI: Corporate sub-strategies. The core EM hedge fund strategy of EH: Fundamental Growth increased to nearly 60 percent of all EM hedge fund capital as of 2Q12, with EM hedge funds also executing on Value, Equity Market Neutral and Energy/Basic Materials sub-strategies.

“Emerging Markets hedge funds delivered compelling performance in both an absolute and relative sense through the two distinct market cycles of the first two quarters of 2012, producing strong gains in the risk-on environment of 1Q12 and preserving those gains through the risk-off environment of the second quarter”, stated Kenneth J. Heinz, President of HFR. “These powerful trends of strategic sophistication and performance transparency, which will continue to define EM hedge funds in coming quarters, are effectively and efficiently captured by the new HFRX Emerging Markets Index.”

In addition to the HFRX Emerging Markets Index, HFR launched two additional HFRX Indices, expanding the number of indices in the HFRX family to 76. Consistent with many of the current HFRX Indices, each of the new indices includes daily performance transparency. Additional details below:

• HFRX Emerging Markets Composite Index includes multiple hedge fund strategies with geographic exposure to one or more Emerging Markets regions and combination of asset classes with emphasis on global macroeconomic, political or specific secular market growth trends.
• HFRX Fixed Income - Credit Index includes strategies with exposure to credit across a broad continuum of credit sub-strategies. The investment thesis across all strategies is predicated on realization of a valuation discrepancy between the related credit instruments.
• HFRX MLP Index includes Master Limited Partnership strategies which are typically exchange listed partnerships that engage in certain businesses, mostly pertaining to the transportation, extraction and storage of certain commodities and natural resources including, but not limited to, oil, natural gas and coal.

(press release)

HFR (Hedge Fund Research, Inc.) is the global leader in the alternative investment industry, specializing in the indexation and analysis of hedge funds. www.hfrx.com

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