Hedge funds investing in emerging markets (EMs) posted strong gains to end the first quarter and have extended those gains into the second quarter, according to data released by Hedge Fund Research (HFR), a provider of hedge fund industry performance and asset flow data.
Following a gain of over one per cent in the volatile first quarter of 2009, the HFRI Emerging Markets (Total) Index advanced over 7.5 per cent in April, the best performance month since December of 2000. Strong performance in March and April offset losses in the first two months of the year, with the HFRI Emerging Markets (Total) Index gaining nearly nine per cent year-to-date.
For the quarter, asset gains due to performance added $5.1 billion (Dh18.73bn) to emerging markets hedge funds assets under management (AUM), nearly offsetting investor withdrawals of $6.4bn. In aggregate, AUM in emerging markets hedge funds declined by $1.2bn to $66.2bn; this followed a drop of nearly $23bn in Q4 2008. The strong performance by emerging markets hedge funds year-to-date 2009 follows a decline of -37.2 per cent in 2008, the worst calendar year performance for emerging markets since HFR began tracking hedge fund data in 1990.
While prone to volatility, emerging markets hedge funds have historically posted strong gains following market bottoms; in the twelve months following the trough of each of the five largest performance declines, these funds have produced an average gain of 23.3 per cent.
"Investors exhibited extreme risk aversion at the end of 2008, withdrawing record amounts of capital. While redemptions continued in the first quarter at a slightly lower level, risk aversion began to recede into the end of the quarter and has continued to fall," said Kenneth Heinz, president of HFR. "Hedge funds investing in emerging markets have produced strong, albeit volatile, long-term performance, posting an annualised gain of more than 12.5 per cent since 1990, nearly double that of the S&P 500."
HFR also noted the following about specific emerging markets:
- Middle East/North Africa (Mena): Funds investing with a dedicated focus on Mena comprise more than two per cent of Emerging Markets hedge fund assets, reflecting an increase from less than 0.5 per cent of emerging markets hedge fund capital in 2002. Mena also receives capital from funds investing in the multiple emerging markets category, and HFR has recently released the HFRX Mena Index which has gained nearly six per cent year-to-date 2009.
- Russia/Eastern Europe: Of all funds focused on Emerging Markets, those investing in Russia/Eastern Europe have posted the strongest performance over the past 10 years, gaining 19.3 per cent annualised, but with tremendous volatility. Over twenty per cent of all emerging market hedge fund capital is currently focused on Russia/Eastern Europe, up sharply from 14 per cent in 2002.
- Latin America: Brazil is second only to China with regard to the number of funds located in any emerging markets region, with more than 7.5 per cent headquartered in Brazil. The 100 funds currently investing in Latin America are the smallest in terms of average size of approximately $40 million, but these posted a gain of nearly two per cent in Q1 2009 and over 9.6 per cent in April alone.
- Emerging Asia: There are currently more than 460 funds focused on Emerging Asia, encompassing 46 per cent of all Emerging Markets funds; nearly 13.5 per cent of Emerging Markets funds are located in China.
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