Research

2015 Overview: Key Trends in Latin American Hedge Funds

Introduction

Latin American hedge funds have been experiencing dwindling interest from investors over the last few years as they cope with redemption pressure and stagnating performance-based gains compared to other regional mandates. The global economic slump throughout 2015 has not spared the Latin American economies - commodity-dependent countries in the region were affected by the slowing growth of export destination countries such as China and the US. The fall in commodity and oil prices and the weakening of the real and peso are also affecting the ability of companies to fulfil their debt obligations, while political instability continues to affect the region. Meanwhile, depending on the Fed’s interest rate hike timing, capital outflows from the Latin American region could put them in a worse shape than before.

Figure 1a: Industry growth over the years
 

Assets under management (AUM) of the Latin American hedge fund industry grew from just US$2.5 billion in 2000 to reach its 2007 peak at roughly US$56.4 billion during the pre-financial crisis period. The Latin American region was not spared from the global financial crisis with AUM declining 25% in 2008 from the previous year. Since then, AUM growth of the Latin American hedge fund industry has been on the decline but the aftermath of the global financial crisis saw some renewed interest into the emerging market economies. Latin American industry AUM peaked at an all-time high in 2013, during which AUM stood at US$60.3 billion, largely on the back of modest performance-driven gains. Despite positive gains, investor outflows in eight consecutive quarters from Q2 2013 to Q1 2015 totalling US$11.5 billion were recorded over this period while performance-driven gains stood at US$4.4 billion over the same eight consecutive quarters. As of September 2015, the Latin American hedge fund industry is currently managing US$54.9 billion in assets with a fund population of 391 hedge funds.

The strength of the Latin American hedge fund industry could face difficult times amid rising volatility, a hawkish Fed on the long awaited rate hike occurring in end-2015 and lacklustre global economic growth weaving into the region’s internal political turmoil. Despite the gloomy backdrop, the Eurekahedge Latin American Hedge Fund Index managed to outperform underlying markets, down 0.52% as of September year-to-date compared to the MSCI EM Latin American Index1 which declined 9.05% over the same period.

 

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Footnote

1MSCI EM Latin American Index (Local)

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