HFR: Hedge Funds Sour On Emerging Markets

Mar 4 2015 | 9:06am ET

Hedge fund capital invested in emerging markets declined to conclude 2014, falling from the record level established in 3Q14 on a combination of performance losses and investor outflows concentrated in funds with exposure to Russia.

The HFRI EM: Russia/Eastern Europe Index declined 18.6% in 4Q14, bringing the 2014 full year loss to 26.5%, making 2014 the third worst calendar year decline for the Index.

Hedge fund capital invested in emerging markets declined by $1.4 billion in the fourth quarter to conclude 2014 at $183.8 billion, according to the latest HFR Emerging Markets Hedge Fund Industry Report, released today by HFR, a global leader in the indexation, research and analysis of the global hedge fund industry.

For the full year 2014, emerging markets hedge fund capital increased by $13 billion on investor inflows of $3.3 billion. Total hedge fund capital invested in Russia fell by $2.8 billion in 4Q and $4.7 billion for FY 2014, down to $21.5 billion AUM.
Inflows into emerging Asia partially offset outflows in Russia/Eastern Europe, with emerging Asia rising by nearly $1 billion in 4Q and $3.5 billion for 2014, bringing total AUM to $50.5 billion.

Hedge fund performance in emerging Asia was led by the HFRI EM: India Index, which climbed 4.2% for 4Q and 42.7% for 2014, topping Indian equities by 1300 bps for the year. The HFRI EM: China Index was up 4.7 in 4Q but posted a gain of only 5.8% for the FY 2014, trailing the strong gain of Chinese equities.

The HFRI EM: Latin America Index declined 5.9% in 4Q and 9.3% for 2014, the second consecutive calendar year decline and third in the last 4 years. Despite the decline, as a result of the sharp fall in the Brazilian Real, the Index topped the performance of Brazilian equities (denominated in US dollar terms) by over 800 bps in 4Q and 500 bps for FY 2014. Total hedge fund capital managed by Latin American-focused hedge funds declined by $600 million in 4Q14 but posted a narrow increase for 2014, ending the year at $10.2 billion AUM.
The HFRI EM: MENA Index also posted as sharp decline in 4Q, falling 8.3%, although this was offset by gains earlier in the year, resulting in a FY 2014 gain of 1.6%. The tepid 2014 performance trailed strong gains of the prior two years, in line with the performance of Middle East equities. Approximately 50 hedge funds invest with a dedicated regional focus on the Middle East, managing over $4 billion in assets.
“Emerging Markets volatility increased sharply into year-end, producing wide performance dispersion across EM hedge funds. With the primary catalysts of sharply falling oil prices, geopolitical tensions and economic sanctions in Russia and weakness in EM currencies driven by gains in US Dollar and Swiss Franc, the top decile of all EM hedge funds gained over 33% for 2014, while the bottom decile declined over 36%, resulting in a dispersion of nearly 70%,” said Kenneth Heinz, president of HFR. “Despite the losses, EM hedge fund investors remained committed to these regions, with total EM capital in aggregate posting a de minimus decline in 4Q, but a meaningful increase for the full year. Sophisticated EM hedge funds which have been positioned for this volatility are likely to drive strong gains in coming months as recent market dislocations normalize and create new opportunities for investors in 2015.”

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