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Emerging markets hedge funds navigate sovereign crisis gaining 4.7% through April - HFR

Thursday, May 20, 2010
Opalesque Industry Update - Emerging Markets (EM) hedge funds gained +4.7 percent YTD through April, suggesting that many EM managers have strategically navigated through much of the still-unfolding EU-centric sovereign debt crisis, according to Hedge Fund Research (HFR), the leading provider of hedge fund industry data. In addition to the significant weakness in the sovereign credit market, funds also encountered volatility in currency, commodity and underlying equity markets, with this volatility accelerating through 2Q10.

Risk-conscious investors repositioned capital in 1Q10, paring investments in Emerging Asia while adding to exposure in Latin America and Multi-EM as total capital invested in EM hedge funds increased to $98 Billion. Strong first quarter performance resulted in a $5.3 Billion increase in EM AUM, which easily offset a small investor net capital outflow of $560 million; this marked the sixth quarter out of the last seven in which investors withdrew capital from EM hedge funds. Some geographic rotation was evident in the most recent data, as redemptions from Asia (ex-Japan) and Russia/Eastern Europe-focused funds exceeded $1 billion combined, while investors added over $500 million to Latin America and funds investing in Multiple Emerging Markets.

Hedge fund managers used a variety of tools to generate gains through the first four months of the year, including not only tactical exposure adjustment but effective use of protection from credit default swaps (CDS) and various currency hedging techniques. While sovereign weakness is presently concentrated in EU countries, many EM managers began to deal with an escalation of EM sovereign credit risk over six months ago (when risk was focused in the Middle East) by using CDS protection to insulate their portfolios from these losses and produce gains if the sovereign credit risks increased.

Additional findings from HFR include:

  • Middle East/North Africa: The HFRX MENA Index posted a gain of +7.9 percent in 1Q10, including a record gain of +9.3 percent in March, the highest monthly gain since index inception in 2005. Despite recent increases volatility in GCC sovereign credit, total MENA-focused capital has been steady and reflects a ten-fold increase since 2003.
  • Russia/Eastern Europe: Since the Rouble devaluation and Russian sovereign debt restructuring in 1998, funds investing in Russia have gained an annualized +23.5 percent, the top performance region for the hedge fund industry. Despite annualized volatility exceeding 22 percent, capital invested in Russia/Eastern Europe now represents over 35 percent of all EM hedge funds.
  • Latin America: Investors allocated new capital to funds investing in Latin America while paring exposure to other regions, suggesting that investors expect Latin America to be insulated from the existing sovereign credit crisis. Over 8 percent of EM funds are located in Latin America, fourth most geographically after US, UK and China.
  • Emerging Asia: Investors pared exposure to hedge funds investing in Emerging Asia, withdrawing over $850M in 1Q10, despite these funds significantly outperforming Chinese equity markets for the period. The HFRX China Index declined by -0.75 percent in 1Q10, a period in which Chinese equity markets fell by over five percent.
“Throughout the ongoing EU-centric sovereign debt crisis, Emerging Markets hedge funds have continued to demonstrate strategic sophistication and performance resilience,” said Kenneth Heinz, President of Hedge Fund Research, Inc. “These qualities are likely to solidify and enhance the appeal of EM hedge funds to global investors in the current environment.”

HFR coming to Asia, announces Industry Summit: Asia 2010

Hedge Fund Research has also announced that it will host its HFR Industry Summit: Asia 2010 in Hong Kong on September 16th & 17th at The Four Seasons Hong Kong. The HFR Industry Summit is the hedge fund industry’s premier private investor engagement, hosted annually in Chicago and London, and this will mark the event’s inaugural appearance in Asia. Corporate website:

- FG

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