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Key Trends in Emerging Market Hedge Funds (September 2021)

Emerging market hedge funds were up 4.32% over the first seven months of 2021, trailing behind their developed market counterparts in North America, Japan and Europe which returned 10.99%, 6.71% and 6.68% respectively. The economic recovery in the emerging markets has lagged their developed market counterparts due to delays in vaccine rollouts that had necessitated the imposition of harsh lockdown measures to prevent hospital systems from getting overwhelmed. The emergence of the highly infectious Delta variant exerted even greater pressure on emerging market economies as the surging numbers of new COVID-19 cases and deaths derailed the reopening plans of many countries. Despite being one of the countries worst affected by the Delta variant in 2021, Indian hedge funds outperformed their emerging market peers in the first seven months of 2021 with a return of 19.13%, supported by the strong returns of the Indian equity market as the S&P CNX Nifty India and BSE Sensex returned 12.74% and 10.13% over the same period respectively. This compares with the much lower July 2021 year-to-date return posted by Latin American and Greater China hedge funds of 2.15% and 1.66% respectively.  

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$19.7 billion at end-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$33.0 billion in 2017 to US$28.0 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 40.4% to US$41.4 billion driven by the strong equity market performance in the region throughout the year. In 2020, Greater China-focused hedge funds witnessed even stronger AUM growth of 68.1% to US$69.5 billion as the exceptional performance of the Chinese equity market in 2020 increased investors’ risk appetite and attracted US$10.4 billion of net investor inflows – the Shenzhen Composite Index and CSI 300 Index produced returns of 35.20% and 27.21% respectively in 2020. As of July 2021, Greater-China focused hedge funds AUM stood at US$74.3 billion, driven by performance gains of US$2.0 billion and net investor inflows of US$2.8 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 July 2021, Indian hedge fund managers collectively oversee US$4.7 billion in assets, representing an increase in AUM of 104.9% from 2012. Nevertheless, the current AUM figure of US$4.7 billion is still about US$0.6 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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