Research

2017 Key Trends in Emerging Market Hedge Funds

Introduction

Emerging market mandated hedge funds have delivered exceptionally strong gains this year – the asset weighted US dollar denominated Mizuho-Eurekahedge Emerging Market Index is up 7.59% for the year, with underlying equity long/short hedge funds for the index gaining 9.75% in the seven months through July. Hedge funds running dedicated exposure to India, China and Latin America have all posted double-digit gains year-to-date and have been the key contributors to the stellar returns posted by emerging market mandated hedge funds. A weakening US dollar, improvements in underlying economic fundamentals and a better risk appetite this year have all contributed to the strong gains for emerging mandates. Further, with Trump’s anti-trade and globalization rhetoric largely contained despite campaign promises, much of the short term fears around emerging market exposure have been brushed aside.

Figure 1 shows the comparative growth of year-end assets under management (AUM) of key emerging mandates mainly Latin America, India and Greater China with a pronounced growth in Greater China assets starting from 2008 onwards. However, assets for Greater China mandated hedge funds declined in the aftermath of the Chinese equity market crash in 2015. AUM for Greater China hedge funds stood at US$27.26 billion at the end of 2015, and declined further in 2016 to US$25.90 billion. That being said, Greater China managers have seen their AUM grow to US$27.62 billion during the first half of the year.

While overseeing a small asset base, Indian hedge fund managers have also seen an uptrend in assets at the start of 2012 onwards as a response to the post-Modi market rally. On the other hand, assets overseen by Latin American hedge funds have shown some slack with the region’s assets declining in 2015 and 2016. Current assets under management for Latin America mandated hedge funds stands at US$57.4 billion.

Figure 1: Growth in assets under management of key emerging mandates

  Growth in assets under management of key emerging mandates

Figure 2 shows the performance of long/short equity hedge funds across key emerging markets focused funds with Indian long/short equities managers up 18.20% year-to-date, outperforming the MSCI Emerging Markets IMI (Local) by close to 5% over the same period. On the other hand, Latin American long/short equities managers came in second place overall with its returns since December 1999 standing at 640.16% underperforming their Greater China-focused counterparts who were up 1056.41% in this period. Indian hedge fund managers gained 297.63% since December 1999, and all three emerging mandates have outperformed underlying markets with the MSCI Emerging Markets IMI (Local) up 146.47% since December 1999.

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