Emerging market hedge funds beat equity returns

Tags: Mutual Funds
By investing in hedge funds, high net worth investors in emerging markets appear to have been able to minimise the impact of the slump in equity markets in August.

Excluding Brazil, key stock markets like India, China, Russia and Mexico, as well as smaller markets in Europe and Asia, fell by as much as 7-8 per cent in August. But, at least two early estimates of emerging market hedge funds show that losses were limited to 3-6 per cent in the same month.

The lower losses from emerging market hedge funds in August is not surprising because these private funds are sophisticatedly managed, so they offset losses during a market downturn or generate returns higher than traditional stock and bond investments.

Emerging market hedge funds have a significant advantage over emerging market mutual funds. While mutual funds typically invest only in stocks and bonds, hedge funds can offer exposure to more sophisticated investments, including commodities, real estate, currencies and derivatives.

Emerging market hedge funds bled more than their developed market peers in August. Hedge funds in Asia lost about 4.25 per cent in August. European funds were down 4 per cent, North American funds were down 2.79 per cent, Japanese funds were down 4.32 per cent and US funds were down 2.83 per cent. These funds appear to have lost less.

Only Australian hedge funds lost more than emerging market funds with 7 per cent value vanishing in August. Emerging market hedge fund capital reached a record new level in the first quarter of 2011, as per data from Hedge Fund Research. Total assets invested in emerging markets hedge funds reached over $ 121 billion that surpassed $ 117 billion recorded in 2007.

In August 2011, Latin American hedge funds delivered the best performance in terms of regional mandates, ending the month with positive, albeit marginal, returns of 0.09 per cent.

All other regional mandates, including emerging markets, finished the month with negative returns – although, it should be noted that, overall, managers were able to outperform underlying markets across the board, according to Eurekahedge, which tracks nearly 25,000 alternative funds globally. It pegs emerging markets hedge funds losses at 2.90 per cent in August.

This performance hasn’t helped new inflows into hedge funds investing in this region.

“August inflows appear to have been driven by commodity and certain credit strategies as emerging markets and event-driven sectors experienced large net outflows,” said Peter Laurelli, vice-president of research division, Channel Capital Group. Channel Capital Group’s early estimates put emerging market hedge funds’ losses at 5.7 per cent in August.




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