Emerging market funds are becoming increasingly lucrative and in H1 2009 they returned 20.18%, the strategy’s best H1 return since 1999. However, being what is considered a more risky strategy, emerging market hedge funds have always been approached with great caution and never more so than at present, when the hedge fund market turmoil has led to some investors withdrawing investments in this strategy. This caution is owing to factors such as political instability, domestic infrastructure problems, currency volatility and limited equity opportunities, which, alongside the decreasing confidence in hedge funds generally, has lead to less interest from newer investors. However emerging market hedge funds are particularly popular with funds of hedge funds and endowments. Funds of hedge funds have the resources and knowledge to invest in more risky strategies and are driven by high returns. Many have set up vehicles concentrating solely on emerging market hedge funds and some have even launched vehicles located within emerging market economies in order to provide them with a better understanding of the opportunities within the area. Nearly half of all hedge fund institutional investors investing in emerging markets are based in North America and over one-third are based in Europe. Regions such as North America and the UK are home to more sophisticated and experienced investors willing to take on this riskier strategy. While we do not expect many new investors to adopt this strategy in 2009, there remains an interest in it amongst the more experienced investors. Hyposwiss Private Bank, Swiss National Accident Insurance Institution and funds of hedge fund manager Pangea Capital are all firms that have recently expressed an interest in this area.
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