Emerging markets- and Asia-Pacific-focused funds feature prominently in fund of hedge funds managers’ investment plans for the coming year. A survey of fund of hedge funds managers conducted by Preqin in December 2017 suggested that the challenging environment within the industry had prompted many respondents to look to maintain their regional allocations over the next 12 months. However, it also illustrated that large proportions of managers were looking to increase their allocation to Asia-Pacific-focused funds (24%) and emerging markets-focused funds (13%) despite these conditions.
The primary reason behind the growing attraction of investing in emerging markets and in the Asia-Pacific region may well be the strong recent performance of funds focused on these geographies. The returns of emerging markets- and Asia-Pacific-focused funds of hedge funds reflect the performance of underlying single-manager hedge funds over the past 12 months, highlighted in the chart below. Asia-Pacific-focused single-manager hedge funds gained 12.43% in this time, one of the highest returns of any top-level geographic benchmark, and outperformed their 2016 return of +2.37%. Hedge funds in the region were buoyed by the strength of the Chinese and Japanese economies and the performance of the Asian equity markets.
China’s economic growth may be forecast to cool in 2018, but India has the potential to thrive and is predicted to be the fastest-growing economy by the IMF1. The Preqin All-Emerging Markets Hedge Fund benchmark followed closely behind the Asia-Pacific region, delivering +11.31% and outperforming the Preqin All-Developed Markets Hedge Fund benchmark (+6.60%). Despite disappointing returns in Q2 in 2017 (+0.04%), following the corruption scandal of Brazil’s President Michel Temer, emerging markets in Latin America recovered to return +12.18% over the past 12 months (as at May 2018). This, combined with emerging markets in Asia gaining 16.28%, helped to boost the performance of the Preqin All-Emerging Markets Hedge Fund benchmark.
According to the survey, fees are still the primary concern for investors. Fund of hedge funds managers must therefore continue to provide value in order to justify their double-layering of fees. There appears to be some confidence among managers that emerging markets- and Asia-Pacific-focused funds will continue to perform well and may begin justifying the higher fees. India’s economic potential, in particular, is prompting managers to increase their exposure to the emerging markets region. Fund of hedge funds managers also have a positive outlook on the Asia-Pacific region despite concerns surrounding a Chinese economic slowdown, with no managers looking to decrease their exposure to these funds.
1International Monetary Fund. “World Economic Outlook Update, January 2018.” http://www.imf.org/en/Publications/WEO/Issues/2018/01/11/world-economic-outlook-update-january-2018 (accessed March 21, 2018).