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Hedge fund capital invested in Emerging Markets increased by $11.2 billion during the fourth quarter of 2012 to a record of $139 billion (272 billion Real, 867 billion RMB, 7.5 trillion Rupee, 4.2 trillion Rubble, 521 billion Saudi Riyal) according to the latest HFR Emerging Markets Hedge Fund Industry Report, published by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry. Net capital inflows to Emerging Markets hedge funds exceeded $3.0 billion in 4Q12, the highest quarterly inflow since 1Q08.

Hedge fund performance was strong across hedge funds investing in BRIC economies, with the HFRX BRIC Index gaining +13.4 percent for 2012. The strongest contribution to EM hedge fund performance was from India-focused hedge funds, with the volatile HFRX India Index gaining +27.6 percent for the year, topping the gain of the Mumbai Sensex and occurring against a backdrop of moderating core inflation and positioning for accommodative policy responses.

The HFRX Brazil, China and MENA Indices gained +9.5, +9.4 and +8.6 percent, respectively for 2012, with each above their respective regional equity markets. Brazil’s Banco Central signaled that Brazil will continue to defend itself from short-term capital flows, which have occurred as a direct result of developed market quantitative easing, while the Chinese central bank reaffirmed its commitment to prudent and stable growth policies, despite stimulus measures by Bank of Japan.

The HFRX Russia Index gained +6.6 percent for 2012, underperforming the gain of Russian equities, but gained +4.0 in January 2013; the Russian central bank adopted a tighter monetary policy in 2H12 as government moved from exchange rate targeting to inflation targeting.

The HFRX Currency Index posted a modest gain of +3.0 percent for 2012, but advanced over +6.0 percent from July 2012 through January 2013, with gains in 7 of the last 8 months.

EM capital flows for 4Q were dominated by flows into Emerging Asia and hedge funds investing across Multiple EM regions, with these receiving $1.3 and $1.5 billion, respectively, while funds investing in Russia/Eastern Europe saw inflows of over $200 million. The number of hedge funds investing in Emerging Markets also reached a new record to conclude 2012, and now total over 1,100 funds. EM hedge funds are also increasingly focused on Currency and Commodity exposure, with Macro hedge funds increasing to 14.4 percent of EM hedge funds, up from 11.0 percent as of year-end 2011.

“Currency volume and volatility increased sharply in 4Q12 in anticipation of, and in response to, Bank of Japan inflation targeting and stimulus measures, and these have continued as Emerging Market economies prepare for the impact that additional stimulus measures and competitive currency devaluation are likely to have in 2013,” stated Kenneth J. Heinz, President of HFR. “Although Macro hedge funds produced only limited gains in 2012, the environment has improved in recent months. Emerging Markets and Macro hedge funds are likely to experience significant opportunities in early 2013 as EM monetary authorities adjust to developed market stimulus efforts by utilizing inflation targeting and various economic stabilization measures.”

Press release

HFR (Hedge Fund Research, Inc.) www.hedgefundresearch.com

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