Emerging Markets Funds Post Record Losses

by Carla Johnson, Investors Offshore.com

27 February 2009

Hedge funds investing in emerging markets concluded 2008 with seven consecutive months of performance declines, resulting in cumulative losses of nearly 37%, according to Hedge Fund Research, Inc. (HFR), a leading hedge fund industry data provider.

According to HFR, this was the worst year of performance since it began tracking emerging markets-focused funds in 1990, eclipsing the previous record decline of nearly 33%, set in 1998.

Investors withdrew USD6.7bn from emerging markets hedge funds in Q4 2008, with total hedge fund capital committed to emerging markets falling to under USD67bn globally. This represents an asset decline in 2008 of nearly 43% from the peak at the end of 2007.

Emerging markets hedge funds have been a top-performing strategy in six out of the past 11 years, an average performer in two of those years, and a near-worst performer in three years. The strategy characteristically experiences sharp recoveries after declines, with an average gain of over 23% in the twelve months following the five largest historical declines.

“Performance of emerging markets hedge funds has historically been characterized by cyclical extremes relative to the rest of the hedge fund industry,” said Kenneth J. Heinz, president of Hedge Fund Research, Inc. “Investors who have endured the volatility have realized an average gain of nearly 13% annually since 1990, with volatility that was similar to that of the S&P 500, which has returned 7.3% annually over the same period.”

Key points in the HFR report for specific emerging markets regions include:

Middle East/Africa: despite losses in 2008, hedge fund capital invested in the Middle East and Africa has grown from less than one half of one percent of emerging markets hedge fund capital in 2002 to over 2%, or nearly USD1.5bn of invested assets. More than 20 funds have an exclusive, dedicated focus on investing in the region, and are located in these markets while also attracting investors globally. These funds have an average asset size of nearly USD75m, second in average size only to Russia among emerging markets hedge funds.

Latin America: hedge funds investing in Latin America posted losses of 29.1% for 2008, the smallest decline of any of the four major emerging markets regions. More than 100 funds focus on investing exclusively in Latin American markets, with an average fund size of just over USD35m per fund, the smallest average of the four emerging markets regions. These funds comprise more than 5% of total emerging markets hedge fund capital, up from 3% in 2002.

Russia: the most volatile of all emerging markets regions, funds investing in Russia and Eastern Europe have realized an cumulative gain in excess of 47% over the last five years; this was achieved inclusive of losses exceeding 57% in 2008. More than 160 hedge funds invest with a dedicated Russia/Eastern Europe focus, with an average fund size approaching USD100m.

Emerging Asia: funds investing in Emerging Asia saw declines of approximately 33.5% in 2008, but this area led all other emerging markets regions with a gain over 3% in December 2008. Emerging Asia is also the only emerging markets region to post positive performance over the past three years, gaining 13.9% cumulatively and 4.4% annualized over that period, which is inclusive of 2008’s declines. Approximately 460 hedge funds, or 45% of emerging markets hedge funds, invest with an exclusive and dedicated focus on Emerging Asia, with an average fund size of nearly USD60m.

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