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Russian volatility weighs on emerging markets hedge funds

Wednesday, March 04, 2015
Opalesque Industry Update - Hedge fund capital invested in Emerging Markets declined to conclude 2014, falling from the record level established in 3Q14 on a combination of performance losses and investor outflows concentrated in funds with exposure to Russia.

The HFRI EM: Russia/Eastern Europe Index declined -18.6 percent in 4Q14 bringing the 2014 full year loss to -26.5 percent, making 2014 the third worst calendar year decline for the Index.

Hedge fund capital invested in Emerging Markets declined by $1.4 billion in the fourth quarter to conclude 2014 at $183.8 billion (1.15 trillion RMB, 534 billion Brazilian Real, 11.2 trillion Russian Rouble, 689 billion Riyal, 11.3 trillion Indian Rupee), 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. For the full year 2014, Emerging Markets hedge fund capital increased by $13.0 billion on investor inflows of $3.3 billion.

The volatile HFRI EM: Russia/Eastern Europe Index declined -26.5 percent for 2014, trailing only the sharp calendar year declines of -59.4 percent in 2008 and -63.9 percent in 1998. Recovering strongly in each of the subsequent calendar years following a major sell-off, the HFRI EM: Russia/Eastern Europe Index gained +50.8 and +83.3 percent in 2009 and 1999, respectively. Since inception in 1995, the Index has posted annualized returns of +11.5percent, nearly identical to the +12.2 percent annualized gain of Russian equities. Over that time, the HFRI EM: Russia/Eastern Europe Index has annualized volatility of 24.7 percent, approximately half of the 48.6 percent of Russian equities. Since inception, the HFRI EM: Russia/Eastern Europe Index has led Emerging Markets hedge fund performance, topping the annualized performance of the HFRI Emerging Markets Composite Index by 300 basis points (bps). Total hedge fund capital invested in Russia fell by $2.8 billion in 4Q and $4.7 billion for FY 2014, down to $21.5 billion AUM.

Inflows into Emerging Asia partially offset outflows in Russia/Eastern Europe, with Emerging Asia rising by nearly $1 billion in 4Q and $3.5 billion for 2014, bringing total AUM to $50.5 billion. Hedge fund performance in Emerging Asia was led by the HFRI EM: India Index, which climbed +4.2 percent for 4Q and +42.7 percent for 2014, topping Indian equities by 1300 bps for the year. The HFRI EM: China Index was up +4.7 in 4Q but posted a gain of only +5.8 percent for the FY 2014, trailing the strong gain of Chinese equities.

The HFRI EM: Latin America Index declined -5.9 percent in 4Q and -9.3 percent for 2014, the second consecutive calendar year decline and third in the last 4 years. Despite the decline, as a result of the sharp fall in the Brazilian Real, the Index topped the performance of Brazilian equities (denominated in US dollar terms) by over 800 bps in 4Q and 500 bps for FY 2014. Total hedge fund capital managed by Latin American-focused hedge funds declined by $600 million in 4Q14 but posted a narrow increase for 2014, ending the year at $10.2 billion AUM.

The HFRI EM: MENA Index also posted as sharp decline in 4Q, falling -8.3 percent, although this was offset by gains earlier in the year, resulting in a FY 2014 gain of +1.6 percent. The tepid 2014 performance trailed strong gains of the prior 2 years, in line with the performance of Middle East equities. Approximately 50 hedge funds invest with a dedicated regional focus on the Middle East, managing over $4 billion in assets.

“Emerging Markets volatility increased sharply into year-end, producing wide performance dispersion across EM hedge funds. With the primary catalysts of sharply falling oil prices, geopolitical tensions and economic sanctions in Russia and weakness in EM currencies driven by gains in US Dollar and Swiss Franc, the top decile of all EM hedge funds gained over 33 percent for 2014, while the bottom decile declined over 36 percent, resulting in a dispersion of nearly 70 percent,” stated Kenneth J. Heinz, President of HFR. “Despite the losses, EM hedge fund investors remained committed to these regions, with total EM capital in aggregate posting a de minimus decline in 4Q, but a meaningful increase for the full year. Sophisticated EM hedge funds which have been positioned for this volatility are likely to drive strong gains in coming months as recent market dislocations normalize and create new opportunities for investors in 2015.”


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

www.hedgefundresearch.com

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