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Sophisticated Investors Lead Appetite for Emerging Markets-focused Hedge Funds – March 2015

by Nat Auld

  • 19 Mar 2015
  • HF

Hedge funds targeting emerging markets have received a significant amount of attention from institutional investors looking to diversify their portfolios, seeking new investment opportunities outside developed regions. Although emerging markets are considered highly volatile investments by some, a significant proportion of investors pursuing high returns have invested in these regions. These high-growth economies have the potential to become fully developed markets, but higher fees and increased political instability in these regions discourage cautious investors.

Preqin’s Hedge Fund Investor Profiles online service currently tracks 1,179 investors that have an appetite for investing in emerging markets, and account for 29% of all hedge fund investors globally. Taking a closer look at this group of investors, the majority of investors (70%) are based in North America, despite investors from this region making up only 66% of all hedge fund investors. Home to a large number of sophisticated and experienced investors, it is unsurprising that North America is so well represented in this group. Consequently, a significant proportion of US-based investors appear to be willing to take on this riskier strategy. Other investors that invest in emerging markets-focused hedge funds are found across the globe, in Europe (20%), Asia (4%) and Rest of World (6%).

The chart above shows investors that have stated a preference for emerging markets by investor type.  Fund of hedge funds managers make up the largest proportion of investors allocating to emerging markets (26%), unsurprising given their wealth of expertise in these regions. Such institutions have the resources, knowledge and connections which allow them to offer investors exposure to emerging markets. Funds of hedge funds allow investors to gain exposure to emerging markets for the first time, which is especially important for investors which do not have an in-house investment team to do the necessary due diligence in these markets. Other investors that have an appetite for investing in emerging markets include foundations (20%), private pension funds (15%), endowment plans (12%) and public pension funds (8%).

One example of an investor seeking to gain exposure to emerging markets is Amundi Alternative Investments. The fund of hedge funds manager is expected to invest in approximately 20 new managers over the next 12 months. It will target hedge fund managers with a bias for relative value approaches such as arbitrage strategies and it will seek opportunities across emerging markets and Europe.

Despite the risks involved with emerging markets, investors are able to benefit from investing through a hedge fund structure, as hedge funds allow investors to generate absolute, risk-adjusted returns. As investors seek to diversify their investment portfolios and look for additional methods of generating returns, emerging markets should continue to receive inflows of investor capital.

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