Emerging Market Hedge Funds Hit Record $123B AUM

Aug 25 2011 | 9:23am ET

Emerging market hedge funds saw their assets under management grow by $1.4 billion in Q2 2011 to a record high of $123 billion, according to the latest data from Hedge Fund Research.

New capital inflows accounted for $300 million of the increase while performance-based returns added another $1.1 billion. This makes four straight quarters of growth for EM hedge funds.

HFR attributes the growing investor interest in emerging markets to factors including the European sovereign debt crisis, the U.S. debt ceiling debate and the weak U.S. economic recovery. Emerging market economies, in contrast, have proved more resilient, with strong currencies and sovereign debt positions, despite increasing inflationary pressures.

Macro hedge funds focused on emerging markets posted a performance gain of about 9% for Q2 (in contrast to globally-focused macro funds which lost 1.67% for the quarter and 0.21% YTD).

EM Relative Value Arbitrage funds posted a performance-based gain of $1.2 billion in Q2, partially offsetting a performance-based decline of $2.1 billion in EM equity hedge.

Overall EM hedge fund performance was muted through the first two quarters of the year, with the HFRI Emerging Markets (Total) Index remaining flat (0.0%) through July while the HFRX Total Emerging Markets Index gained 0.67%.

EM exposure in funds investing in Russia and Latin America contributed positively to the second quarter results—Russian funds added 3.6% through July—offsetting the performance of Emerging Asia and Latin America—HFR’s EM Asia (ex-Japan) Index declined 1.9%.

The number of EM hedge funds held steady at 1,000, but such funds represented over 10% of global hedge fund launches and over 16% of liquidations in Q2.

“Through mid-year 2011, the decoupling and divergence of emerging markets from their developed market counterparts has become increasingly evident and significant, and can be seen across currencies, sovereign debt, and different types of hedge fund exposure,” said Kenneth J. Heinz, president of HFR. “As risk aversion has increased through mid-2011, investors are increasingly looking to emerging market hedge funds not only for continued secular economic growth, but also for tactical exposure to macroeconomic trends, currency stability, and hedged, uncorrelated exposure to developed market equities. A likely continuation of these trends will drive capital growth in EM hedge funds in the second half of 2011.”

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