Current Investor Attitudes towards Emerging Markets Hedge Funds - September 2012

by Graeme Terry

  • 25 Sep 2012
  • HF

Preqin currently tracks 754 institutional investors that indicate a preference for investing in emerging markets, a substantial increase on the number that were interested in such funds in 2011. Emerging markets hedge funds had previously been ignored by more cautious investors due to higher fees, higher volatility, and the fact that they were often harder to source and assess. However, these funds are growing in popularity as investors become increasingly dissatisfied with returns from more traditional areas. Emerging markets hedge funds have performed relatively well so far in 2012 and their increasing sophistication means they are now a viable alternative to traditional hedge fund investments for all groups of investors.

Sovereign wealth funds can be an important source of capital for emerging markets hedge funds, with 57% of these investors indicating a willingness to invest in these funds. Many sovereign wealth funds are themselves based in regions with emerging markets and, as a result, find investing in such funds appealing. Funds of hedge funds are also a key source of investor capital due to their global investment mandates. Additionally, 37% of fund of hedge funds managers indicate that they will allocate to emerging markets. Endowment plans are established investors with strong fund selection experience, and 21% of these investors will allocate to emerging markets. Appetite for emerging markets hedge funds has increased across all investor types, with a sizeable proportion of asset managers, foundations, family offices, and pension funds also indicating an interest in the strategy.

In terms of the location of emerging markets investors it is fairly evenly split across all regions, with 21% of Europe-based investors, 20% of Asia and Rest of World-based investors and 19% of North America-based investors showing a preference for these funds. Investors can gain exposure to a variety of different hedge fund approaches by investing in funds focused on emerging markets. Murphy Family Office is looking to invest in global macro emerging markets funds over the next year; meanwhile hybrid fund of funds manager Hatteras Funds plans to focus on long/short equity in emerging markets.

The number of emerging markets hedge funds has reached a record high in 2012 and they now account for approximately 14% of all hedge funds. Examples of large hedge fund managers that offer emerging market strategies include BlueCrest Capital, Brevan Howard Asset Management and Man Investments. Meanwhile, Singapore-based asset manager Milltrust International recently added its first three funds to its emerging markets hedge fund platform. These funds provide access to Brazil, Latin America and Greater China equities.

Emerging markets hedge funds have been successful in attracting capital from investors so far in 2012, and there is evidence to suggest that an increasing number of investors are targeting the strategy. A number of investors have plans to invest in emerging markets focused hedge funds over the coming year as they look for ways to increase diversification and enhance returns. As a result, there should be plenty of opportunities for managers of emerging markets hedge funds to continue raising capital over the remainder of 2012 and into 2013.

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