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Institutional Appetite for Emerging Market Hedge Funds

by Katherine Johnson

  • 31 Oct 2011
  • HF

Emerging market hedge funds continue to present an interesting investment opportunity to a select number of investors. There are 265 institutional investors on the Preqin product that have stated a preference for such funds and 2011 has seen a healthy amount of capital poured into these markets.  While emerging markets are notably moving in the right direction, they can easily become expensive and are more likely to be exposed to political issues, making them less attractive. Emerging market hedge funds represent around 5% of the hedge fund universe, making them harder to access than other funds. Cautious investors are likely to stay away from such funds in favour of strategies that do not present such a high risk. Despite the risk involved in emerging market investments, investors are more likely to benefit by investing through a hedge fund structure than other types of investment.  The hedge fund structure allows the investment manager to decrease volatility by more than half without giving up half of the returns. It is expected that interest in emerging market hedge funds will increase as emerging markets develop and grow.

Fund of hedge funds have the largest appetite for emerging market hedge funds and twenty percent of such funds state a preference for emerging markets hedge funds. Their expertise in the asset class allows them to choose riskier strategies that other investors may avoid. Thirteen per cent of Asset managers express an interest in emerging market funds, as well as eleven per cent of endowments which are typically some of the more experienced investors. Other investor types have a small appetite for such funds but we can expect this to change as their confidence in hedge fund investing increases.

Emerging market hedge funds receive a relatively stable amount of interest from investors across the world. European investors have the largest appetite for such funds with 14% of investors in the region stating a preference for such funds. Asian investors follow closely behind, with 13% stating that they would consider investing in emerging market hedge funds. Only 9% of US investors state an interest in the strategy. US investors may be less likely to invest in emerging market hedge funds as they have access to the top managers in the world and less need to look in other regions for good investment opportunities.

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