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Emerging Market hedge fund assets rise to record despite Russian losses

Friday, May 30, 2014
Opalesque Industry Update - Hedge funds focused on investing in volatile Russia and Eastern Europe have posted steep losses year-to-date (YTD), with Russian equity, currency, sovereign bond and commodity markets declining sharply as a result of the crisis in Ukraine. The HFRI EM: Russia/Eastern Europe Index fell -9.7 percent YTD through April, the worst decline since the Index lost -10.5 percent in May 2012, according to the latest HFR Emerging Markets Hedge Fund Industry Report, released today by HFR, the established global leader in the indexation, research and analysis of the global hedge fund industry.

Despite the steep performance losses in Russia, total hedge fund capital invested in Emerging Markets rose to $175.6 Billion (1.01 Trillion RMB, 393 Billion Brazilian Real, 6.037 Trillion Russian Rouble, 658 Billion Riyal, 10.36 Trillion Indian Rupee) a seventh consecutive quarterly record, as inflows into Emerging Asia, Middle East and Multi-EM offsetting performance based asset declines in Russia and Latin America. Investors allocated $3.4 billion of new capital to hedge funds as EM hedge fund assets increased by nearly $5 billion during the quarter.


The HFRI Emerging Markets (Total) Index, a broad-based EM composite including EM focused hedge funds across all regions, posting a decline of - 1.0 percent YTD through April, with Russia-focused funds representing approximately 15 percent of the index composition. Hedge funds investing in India and the Middle East have posted the strongest performance YTD, with the HFRI India Index gaining +10.1 percent through April, while the HFRI MENA Index was up +5.8 percent over the same period, extending the MENA gain of +21.8 percent from 2013. Nearly 50 funds focus on investing in the MENA region, collectively managing nearly $4.0 billion as of the end of Q1.

The HFRI EM: Latin America Index posted a YTD decline of -0.4 percent through April, although the Index has posted 3 consecutive monthly gains totaling 5.0 percent cumulatively, after declining -5.4 percent in January. Total hedge fund capital invested in Latin America declined to $9.9 billion as of the end of Q1, with over 100 funds investing with a dedicated focus on Latin America.

The HFRI Asia ex-Japan Index also posted a narrow decline of -0.6 percent YTD through April, topping the decline of the Shanghai Composite with gains in Asian Macro and ED strategies, as well as contributions from funds with exposure to India. Hedge fund capital invested in Emerging Asia as of the end of Q1 increased to nearly $48 billion across 520 funds.

Total capital invested in Russian hedge funds declined to $25.1 billion as of the end of Q1, with performance-based losses offsetting an investor inflow of nearly $300 million, which arrived in spite of the ongoing tumult in Ukraine. As of the end of Q1, approximately 170 funds invest with a dedicated focus on Russia and Eastern Europe, with these funds having posted an average gain of +4.4 and +9.3 percent in 2012 and 2013, respectively.

“Investors in Emerging Markets hedge funds typically have a tolerance for volatility and expectation of high returns; those investing in funds focusing on exposure to Russia and Eastern Europe categorically have the highest tolerance for volatility, which was imperative through the 1st quarter in which the political, secular and economic uncertainty associated with Russian capital markets and Ukraine reached extreme levels,” stated Kenneth J. Heinz, President of HFR. “Historically, sharp drawdowns in EM and Russian exposure are typically followed by strong performance recoveries. Since the May 1994 inception of the HFRI Russia/E. Europe Index has gained nearly 14 percent annualized, over 400 bps per year better than equity markets or the broad based hedge fund industry, and investors which are able to maintain or increase exposure through characteristic EM drawdowns should expect a strong recovery over the intermediate timeframe.”

Press release

www.hedgefundresearch.com

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