News Investors wary of putting money with top-performing emerging market hedge funds

Date: Monday, December 6, 2010
Author: Madison Marriage, Hedge Funds Review

Emerging markets hedge funds show strongest growth year-to-date but investors have allocated only $10 million of net new capital to these hedge funds compared with $19 billion to developed markets.

Assets under management in emerging market hedge funds now total $105 billion, the highest since the second quarter of 2008, according to data from Hedge Fund Research.

"As global investors continue to focus on sovereign credit and currency risks, performance gains in emerging market hedge funds have failed to attract net new investment capital," commented Kenneth Heinz, president of Hedge Fund Research.

The disappointing asset flows are not reflected in fund performance so far this year. HFRI Emerging Markets (Total) Index gained 9.3% through October, continuing gains by this group of hedge funds. The broad-based HFRI Fund Weighted Composite Index gained 6.8%.

Within the category, funds investing in the Middle East showed the strongest gains with the HFRX MENA Index, gaining 13.3%.

Emerging Asia and Russia brought in a strong performance with the HFRI EM: Asia ex-Japan Index and the HFRI EM: Russia/Eastern Index both returning 9.5% in October.

Latin America was the weakest of the regions. The HFRI EM: Latin America Index gained only 6.7%.

Over two-thirds of all emerging markets funds follow equity hedge strategies, more than double the overall industry average of 30%. Emerging market funds focused on macro strategies are only slightly lower than the overall industry average, with relative value arbitrage and event driven strategies much lower than the overall industry average.

Ucits III-compliant hedge funds are proving to be popular with emerging market fund managers with 120 managers opting for the wrapper.

"Emerging markets hedge funds offering more strategic exposure, Ucits III conformity and local market specialisation are likely to appeal to investors as the EU sovereign credit crisis continues", notes Heinz.