Hedge Funds Targeting Emerging Markets Present a Divergence in Performance over Recent Years

by Boris Friedman

  • 09 Apr 2015
  • HF

Hedge funds focused on emerging markets provided a mixture of fortunes for investors in 2014. According to the 2015 Preqin Global Hedge Fund Report, emerging markets-focused funds worldwide posted a cumulative return of +3.31% in 2014, with a divergence of returns posted by each region individually. Funds focused on markets in Asia generated the highest returns in the emerging markets sector, gaining 18.36% in 2014. Africa-focused funds returned +6.98%, followed by Latin America-focused funds (+1.09%). Russia & Eastern Europe-focused funds fell deep into the red in 2014, with an average benchmark loss of -25.58% amid ongoing political and economic turmoil in the region.

Given the ongoing crisis in Ukraine, the region became a difficult place for economic growth. On top of this, economic sanctions placed on Russia impacted growth and led to devaluation in currency. Looking more closely at Latin America-focused funds, a major cause of low returns were the economic conditions in Brazil. The Brazilian Real hit a nine-year low in 2014. Concerns about Brazil’s increasing sovereign debt led the S&P to downgrade Brazil’s rating to one level above junk. Elsewhere in Latin America, Colombia (a net exporter of oil) provided an unfavourable landscape for investors due to falling oil prices. In addition, socialist political policies proposed by the Colombian Government created a perceived anti-business environment. Across the globe in Asia, the investment atmosphere was far more positive. A big factor in the higher returns of Asian emerging markets-focused funds in 2014 was the strong growth in Chinese and Indian equity markets, with China’s SSE Composite Index gaining 76.76% and India’s CNX NIFTY Index also performing well, gaining 38.99% during 2014. 

For the first two months of 2015, hedge funds with a focus on emerging markets returned +1.59%, according to Preqin’s Hedge Fund Analyst online service.  During the same period last year, emerging markets-focused hedge funds were in the red, losing 0.24%. Asia-focused funds have shown continued growth, gaining 3.24% for 2015 YTD (as of February 2015) and surpassing the Preqin All-Strategies Hedge Fund benchmark which stood at 2.13% for the same period. Africa-focused funds came a close second, gaining 2.58%, while Latin America-focused funds have not fared as well so far, losing 1.25%. After seven straight negative monthly returns, funds focusing on Russia & Eastern Europe gained 8.12% for the month of February and are up 7.80% for the year so far. With central bank action stabilizing the Russian rouble, and fears of further economic sanctions being alleviated after Russia agreed to a cease-fire with Ukraine, last month saw Russia’s MICEX stock index gain 12.54% for the year as of late March.

According to the 2015 Preqin Global Hedge Fund Report, 23% of hedge fund managers had a focus on emerging markets in 2014 – a significant share of the hedge fund sector. Markets in Asia and Africa have provided more consistent gains for investors in the past few years when compared with other emerging markets. In general, fund managers looking to invest in emerging markets should be aware of the various risks associated with developing regions. 

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