Research

2018 Key Trends in Latin American Hedge Funds

Introduction

The Eurekahedge Latin American Hedge Fund Index was up 5.06% as of March 2018 year-to-date, narrowly outperforming the underlying equity market as represented by the MSCI EM Latin America IMI Index which gained 4.76% over the same period. Latin American hedge fund managers continued to ride on their momentum from last year’s rally despite the difficult trading situations in the first quarter of 2018 which led to the poor performance of the global hedge fund managers who lost 0.30% on average in the quarter. Robust labour market and strengthening private consumption, combined with healthy commodity exports are expected to provide support for the region’s economies, while on the other hand protectionist policies in the United States and political uncertainties induced by the upcoming elections in Brazil, Colombia and Venezuela are among the major downside risks for investors looking into Latin America.

The industry assets of Latin American hedge funds stood at US$66.3 billion as of March 2018, up around US$1.4 billion as of year-to-date, while on the other hand, the industry population continued its streak of decline which has lasted for almost a decade, with seven funds closing down in the first quarter of the year.

Figure 1: Latin American hedge fund industry growth
 Latin American hedge fund industry growth

Onshore funds continue to outperform their offshore peers in 2018, and collectively manage 56% of the total hedge fund industry assets under management (AUM) of Latin America. Among the geographic investment mandates, Brazil, Latin America and globally investing funds all posted greater than 10% year-to-date returns, leaving funds that invest in emerging markets behind. Looking at strategic mandates, long/short equities hedge funds managed to maintain their lead with an 8.09% gain as of March 2018, narrowly beating their peers utilising event driven strategies who posted a 7.60% return over the same quarter.

Asset flows

Figure 2 shows the AUM growth of the Latin American hedge fund industry since January 2012 together with the quarterly asset flows. The industry grew by US$3.1 billion in 2012, largely on the back of performance-based gains (US$4.0 billion) with the Eurekahedge Latin America Hedge Fund Index gaining 10.98% in 2012. The Fed’s intent to taper QE in 2013 saw a trend of outflows from the Latin American hedge fund industry with eight consecutive quarters of investor outflows since Q2 2013 through Q1 2015 with redemptions totalling US$11.5 billion, even though managers posted modest performance-based gains (US$4.5 billion) over the same period of time. Investors’ interest into Latin American hedge funds continue dwindled in 2016 with net outflows totalling US$2.1 billion, while managers posted modest performance-based gains of US$1.8 billion.

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