Emerging market hedge funds see assets decline in first quarter

Date: Friday, May 16, 2008
Author: Hedgeweek.com

Hedge funds offering exposure to emerging markets saw their assets under management fall by nearly 5 per cent in the volatile first quarter of 2008, with total capital declining from more than USD115bn at the end of last year to about USD110bn, according to Chicago-based industry data provider Hedge Fund Research.

HFR says the decline, which was entirely down to poor performance, is in sharp contrast to recent trends that have seen emerging market hedge funds boost their assets more than fourfold since 2002. Despite the weakness in performance, investors continued to allocate capital to the sector, which attracted nearly USD600m of net new inflows during the quarter.

Latin America and Africa both proved popular with investors, ending the quarter with net increases in assets, while Russia and Eastern Europe also continued to attract capital, with investors allocating more than USD400m to these funds. In spite of the market volatility, the total number of funds investing in emerging markets rose from 1,020 to around 1,050.

'A combination of factors including expectations for slower developed market growth in the near term, a weaker US dollar and persistent strength in commodities have continued to drive interest in emerging markets-focused hedge funds,' says HFR president Kenneth Heinz.

Emerging Asia was the weakest area of hedge fund performance in the first quarter, with the HFRI Emerging Markets: Asia ex-Japan Index falling more than 12 per cent. This contrasted with a drop of 2 percent for the HFRI Latin America Index and a decline of 7.3 per cent for the HFRI Emerging Markets (Total) Index. Globally, the HFRI Fund Weighted Composite fell 3.06 per cent.

Says Heinz: 'In spite of the performance-based asset decline which impacted most financial markets in the first quarter, the increase in the number of funds focusing on emerging markets, as well as net inflows of capital into Russia, Eastern Europe and Africa, suggest that hedge fund managers as well as investors continue to find compelling opportunities in these regions.'

Overall investors pulled back from investing in hedge funds during the first quarter, with just USD16.5bn in net new capital coming into the industry and total assets under management rising only marginally, from USD1.868trn to USD1.875trn. Assets in funds of hedge funds were also virtually static at just over USD800bn. This follows a year in which investors allocated a record USD194bn to the industry.

HFR data is based on more than 12,000 funds tracked historically by the firm, including more than 7,600 funds reporting as part of the HFR Database subscription product. Founded in 1993, HFR Group is a provider of hedge fund data, research, indexation and asset management products and services, including the HFRI and HFRX indices of hedge fund industry performance.