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Key Trends in Emerging Market Hedge Funds (November 2020)

Emerging market hedge funds were up 5.11% over the first three quarters of 2020, outperforming their developed market counterparts in North America, Europe and Japan which generated 3.99%, -1.51% and -3.37% respectively. In the first quarter of 2020, the Eurekahedge Emerging Markets Hedge Fund Index tumbled 10.66% as the coronavirus pandemic broke out in in Wuhan, China, forcing Chinese authorities to put the city on lockdown on January 23. As the pandemic worsened, the lockdown was extended to the rest of Hubei province and the World Health Organisation on January 30 declared the outbreak a global public-health emergency. On March 11 2020, the World Health Organisation officially declared the outbreak a pandemic as coronavirus cases began to increase sharply in many parts of the world and forced many countries to implement lockdown measures in a bid to halt the rapidly escalating number of cases and prevent healthcare systems from being overwhelmed. Emerging markets were severely impacted by this development, as reflected by the MSCI Emerging Markets IMI (Local) tumbling 20.1% in the first quarter of 2020, which was the weakest quarterly performance of the index since the 2008 global financial crisis. Despite the horrible start to the year, emerging market hedge funds eventually managed to find their footing as the Eurekahedge Emerging Markets Hedge Fund Index rebounded 17.55% from April to September 2020. As China was the first emerging market country to successfully contain the coronavirus, Greater China hedge funds outperformed their emerging market peers in the first nine months of 2020 and were up 19.23%. This compares with the much lower year-to-date return posted by Indian and Latin American hedge funds of 6.41% and -3.21% respectively as their countries continue to be swarmed by recurrent waves of coronavirus infections, dampening investors’ confidence.

Figure 1 below shows the comparative growth of year-end assets under management (AUM) of key emerging mandates: Latin America, India and Greater China. Assets for Greater China-focused hedge funds grew rapidly following the 2008 financial crisis, outpacing the asset growth of Latin American hedge funds. Assets under management for Greater China hedge funds stood at US$27.3 billion at the end of 2015 and declined to US$19.5 billion as of the end of 2016 as fund managers struggled under the region’s dismal equity market performance. In 2017, Greater China-focused hedge funds managed to bounce back strongly and recorded an exceptional performance which has not been seen since 1999 by posting 12 consecutive months of gains in a year, which is consistent with the exceptional equity market performance in 2017. In 2018, AUM of Greater China-focused hedge funds declined from US$32.1 billion in 2017 to US$26.8 billion, largely driven by the equity market sell-off triggered by the US-China trade war. In 2019, AUM of Greater China-focused hedge funds grew by 36.6% to US$36.6 billion driven by the strong equity market performance in the region throughout the year. As of September 2020, Greater China-focused hedge funds AUM stood at US$52.4 billion, driven by performance gains of US$10.3 billion and net flows of US$5.5 billion.

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

Despite overseeing a relatively smaller asset base, Indian hedge fund managers have also managed to grow their assets steadily, especially from 2012 onwards as a result of the post-Modi market rally. As of September 2020, Indian hedge fund managers collectively oversee US$4.3 billion in assets, representing an increase in AUM of 86.9% from 2012. Nevertheless, the current AUM figure of US$4.3 billion is still about US$1 billion short of the US$5.36 billion AUM figure recorded in 2007 prior to the 2008 Global Financial crisis, when Indian hedge fund managers experienced a staggering decline in AUM of US$3.6 billion in a single year.

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