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Emerging markets hedge funds surge as equities gain through global pandamic

Thursday, August 27, 2020
Opalesque Industry Update - Emerging Markets and Asian hedge funds surged in 2Q 2020, recovering from steep losses experienced in late 1Q, with many indices posting gains for YTD 2020 through July. The HFRI China Index gained +6.8 return in July, which followed a +14.5 percent in 2Q, the best quarterly performance since 1Q 2019, to bring YTD performance to +13.1 percent, as reported today with the release of the HFR Asian Hedge Fund Industry Report and the HFR Emerging Markets Hedge Fund Industry Report from HFR.

Hedge fund capital invested in Emerging Markets also surged concurrent with the record performance gains, ending 2Q at $244.4 billion (Chinese Renminbi: 1.55 trillion, Brazilian Real: 1.24 trillion, Indian Rupee: 16.6 trillion, Russian Ruble: 16.9 trillion, Saudi Real: 842 billion), an increase of nearly $13 billion from the prior quarter. Hedge fund capital invested in Asian markets also increased to $115.5 billion (Chinese Renminbi: 798 billion, Indian Rupee: 8.57 trillion, Japanese Yen 12.28 trillion, Korean Won 1.09 trillion).

The HFRI Emerging Markets (Total) Index advanced +12.8 percent in 2Q, the strongest quarterly gain since 4Q 2001, followed by a +4.5 percent gain in July, bringing YTD performance to essentially flat for the year. Hedge funds across all EM regions posted similar strong gains in 2Q, with the HFRI EM: Russia/ Eastern Europe Index surging +15.1 percent, while the HFRI EM: Latin America Index advanced +13.6 percent and the HFRI EM: MENA Index added +4.9 percent in the quarter. Through July, hedge funds investing in Russia have outperformed Russian equities by 1700 bps while LatAm-focused funds have outperformed LatAm equities by 1400 bps.

The HFRI Fund Weighted Composite Index®, the global benchmark for funds investing across all regions and strategies, has gained +12.3 percent over the last four months (April - July), nearly recovering the entire 1Q decline of -11.6 percent. Similarly, the investable HFRI 500 Fund Weighted Composite Index has gained +10.8 percent over the last four months (April - July), bringing YTD performance to a narrow decline of -0.2 percent. The HFRI Asia w/Japan Index gained +2.9 percent in July to increase the YTD return to +0.9 percent.

Currency-focused strategies have produced strong gains through the pandemic, driven by recent declines in the U.S. dollar against both EM and developed currencies, with the HFRI Currency Index gaining +6.2 percent YTD through July.

Cryptocurrency-focused hedge funds have also surged in recent months, with cryptocurrency exposure contributing to recent gains in EM-focused funds. The HFR Blockchain Index surged +26.8 percent in July, bringing YTD performance to +47.8 percent, while the HFR Cryptocurrency Index jumped +30.6 in July, bringing YTD performance to +51.4 percent.

"Emerging Markets hedge funds have navigated the pandemic volatility in recent months, with gains across regional equities, currencies and commodities narrowing or entirely offsetting early 2020 losses as the coronavirus pandemic was beginning its impact on the global economy," stated Kenneth J. Heinz, President of HFR. "The macro and geopolitical environment has shifted and evolved into the second half of the year, with ongoing risk continuing, associated with the global pandemic, as well as with regard to global stimulus and recovery efforts, ongoing trade tensions and the uncertainty of the U.S. election. EM & Asian hedge funds that are positioned for this fluid environment and which have demonstrated performance generation in recent months are likely to lead industry performance and attract institutional investors."

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