Research

2018 Overview: Key Trends in Emerging Market Hedge Funds

Introduction

Emerging market mandated hedge funds were down 3.96% year-to-date, as they struggled to mitigate the losses suffered from underlying equity markets, as represented by the 5.27% loss posted by the MSCI Emerging Market IMI Index (Local). The Eurekahedge Emerging Markets Hedge Fund Index was down in seven months throughout the first three quarters of 2018, marking it as one of the worst years for emerging market hedge funds since 2011. The trade friction between the United States and China was a key contributor to the selloff in emerging equity markets, especially within the Greater China mandates. Further tightening in central bank policies across the developed markets, especially in the US also contributed to the strong capital outflow from the emerging markets. Turkey’s economic instability which sent its currency plummeting against the US dollar was another key highlight for investors looking into emerging markets.

Figure 1 below shows the comparative growth of year-end assets under management of key emerging mandates: Latin America, India and Greater China. Assets for Greater China-focused hedge funds grow rapidly following the 2008 financial crisis, outpacing the asset growth of Latin American hedge funds. Assets under management (AUM) for Greater China hedge funds stood at US$27.3 billion at the end of 2015, and declined to US$25.9 billion as of end-2016, as fund managers struggled under the region’s equity market performance. Throughout 2017, they managed to bounce back and recorded an exceptional performance which has not been seen since 1999 by posting twelve consecutive months of gains in a year, thanks to underlying equity market performance. Going into 2018, the mandate declined their assets from US$29.3 billion in 2017 to US$28.6 billion over the first three quarters of the year, as a result of, the challenges faced by the region’s equity markets.

While overseeing a comparatively small asset base, Indian hedge fund managers have also steadily grown their assets, especially from 2012 onward as a response to the post-Modi market rally. As of September 2018, Indian hedge fund managers collectively oversee US$5.4 billion in assets. Over in Latin America, the assets managed by hedge funds in the region grew by nearly 20% throughout 2017, owing to strong investor allocations and performance-based growths, as Latin American fund managers posted exceptional returns throughout the year. Despite the numerous challenges faced by the region’s economies, Latin American hedge fund industry AUM stood at US$64.5 billion as of September 2018, marginally down from the end of 2017 figure of US$64.9 billion.

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

Figure 2 shows the performance of long/short equities hedge funds across key emerging markets-focused funds. Latin American long/short equities managers were up 1.40% year-to-date, outperforming the MSCI Emerging Markets IMI Index (Local) which was down 5.27% over the same period. On the other hand, Greater China and India long short equities managers who had exceptional 2017 performance and delivered more than 30% return were down 8.29% and 12.19% respectively throughout the first three quarters of 2018.

Figure 2: Performance of long/short equities hedge funds across key emerging markets-focused funds
 

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