Opalesque Industry Update –Hedge funds investing in Emerging Markets reversed sharp 2008 losses with strong gains in 2009, as the HFRI Emerging Markets (Total) Index gained +40.4 percent for the year, according to data released today by Hedge Fund Research, Inc., the leading provider of data and analysis of the hedge fund industry. This rate of return doubled
the overall industry gains as represented by the HFRI Fund Weighted Composite Index, and was led by funds investing in Russia, Latin America, and Emerging Asia. |
Assets invested in Emerging Markets hedge funds increased by $25 billion during 2009 to over $93 billion, as performance-based gains of $34.3 billion more than offset total investor withdrawals of $8.5 billion. Withdrawals were significant in the first half of the year, but moderated through mid-year and ended 2009 with a small net inflow of nearly $400 million in the fourth quarter.
Despite the strong gains of 2009, Emerging Markets hedge funds remain well below their previous performance peak (or high watermark) and still require a gain of +14.6 percent from year-end level to fully recover from the drawdown of -39.8 percent which began in 4Q07.
Sovereign risk and service provider updates
Emerging Markets funds ended 2009 with 10 consecutive months of positive performance, only to see this streak broken in January 2010 when these funds experienced a loss of -1.24 percent. Tensions surrounding sovereign credit risk began to mount in 4Q09 and continued through January, contributing to volatility in currencies, commodities and emerging market equities.
Continuing the trend of localization, the number of Emerging Markets funds located in China, Russia, India and Australia increased, while the number in the U.S. and U.K. continued to decline.
The top prime brokers for Emerging Markets hedge funds remain Morgan Stanley and UBS, with both Credit Suisse and Citibank increasing market share. Similarly, top administrators are Citco and HSBC, with Northern Trust and International Fund Services increasing market share.
Region-specific performance and fund growth
• Middle East/North Africa: The HFRX MENA Index posted a gain of +28.3 percent for 2009, its best yearly total since the index was created in 2005. This performance took place despite tremendous local equity market volatility and sovereign credit concerns centered in the UAE in the fourth quarter. Over 20 funds maintain a dedicated focus on investing primarily in theMENA region, managing 2.5 percent of total Emerging Markets hedge fund capital.
• Latin America: Led by strong performance in mining and commodity-sensitive funds, the HFRX Latin America Index returned +41.6 percent in 2009. Over 100 funds globally invest with a dedicated focus on Latin America, and account for $12.3 billion of investor capital.
• Russia/Eastern Europe: Historically the most volatile of the Emerging Markets regions, the HFRI Russia/Eastern Europe Index gained +51.4 percent in 2009. Over 160 funds invest with a dedicated focus on Russia/Eastern Europe, and more than 6 percent of all EM funds are now located in Russia.
• Emerging Asia: The HFRX China Index gained +50.4 percent in 2009, and over 470 funds globally currently invest with a dedicated focus on Emerging Asia. Over half of all Emerging Market hedge fund capital is invested in Emerging Asia, and recent regulatory developments in Chinese financial markets are likely to be a catalyst for continued hedge fund industry growth in the region.
“Developments in sovereign bond markets in recent month have reminded investors of the credit risk and volatility inherent in Emerging Markets, and these risks are likely to persist throughout the rest of the year,” said Ken Heinz, president of Hedge Fund Research, Inc. “Despite this volatility, investors are allocating to Emerging Markets hedge funds expecting these economies to play a significant role in the ongoing global recovery.”