Hedge Funds Chalk Up Strong Emerging Markets Performance

Editorial Staff 2 January 2024

Hedge Funds Chalk Up Strong Emerging Markets Performance

One of the standout features of hedge fund performance in 2023 – at least until the end of November – was a scorching run by emerging market funds. The data will add to perceptions that hedge funds remain an important part of the wealth management chessboard.    

Emerging markets hedge funds surged into late 2023 on falling inflation, interest rates, and a weakening dollar, according to industry data.

The HFRI EM: Latin America Index compiled by Chicago-headquartered Hedge Fund Research rose by 8 per cent in November, raising the year-to-date return to 18.3 per cent, HFR reported late last year.

“Emerging markets hedge funds, especially funds focused on Latin America and India, have surged since mid-Q4, a sharp reversal of the volatile risk-off trends which dominated the majority of the year, to a powerful risk-on sentiment driven by surprise declines in inflation and interest rates,” Kenneth J Heinz, president of HFR, said. 

Emerging markets have witnessed contrasting fortunes in recent times; rises to US central bank interest rates after the pandemic were headwinds for countries that had borrowed in US dollars and a rising dollar exchange rate, but subsequent expectations of a peak to US rates have helped EM markets.

Also, the fortunes of certain countries continue to benefit from a change to global supply chains amid US-China tensions. India has seen its stance as a supplier grow, for example. Improvements in India markets meant that the HFRI EM: India Index of hedge fund returns linked to the country rose by 7 per cent in November, bringing the year-to-date gain to a sizzling 27.3 per cent. 

Rises in cryptocurrency prices during much of 2023 – confounding some sceptics after the market rout of 2022 – also buoyed hedge funds linked to these digital entities. Hedge funds with high exposure to cryptocurrency across EM regions including Korea, Russia, China, the Middle East, as well as Japan have surged thus far in 2023, with the volatile HFR Cryptocurrency Index rising by 9.9 per cent in November. This brought its year-to-date return 49 per cent, after plunging 54 per cent in 2022.

In other data, the HFRI Emerging Markets (Total) Index, which covers all EM regions, advanced 4 per cent in November to increase its year-to-date return to 6.0 per cent. The HFRI Fund Weighted Composite Index®, which consists of funds investing in both emerging and developed markets, gained 4.9 per cent year-to-date through November, led by the HFRI Equity Hedge (Total) Index, which jumped 6.7 per cent through the first 11 months of the year.

Despite the military conflict following the Russian invasion of Ukraine continuing through its second year, hedge funds investing in Eastern Europe and Russia surged in recent months through unprecedented uncertainty and volatility, with the HFRI EM: Russia/Eastern Europe Index vaulting by more than 24 per cent from June through November. After declining -15.6 per cent in the first five months of the year, the Index is now back into positive territory, up an estimated 4.8 per cent year-to-date through November; this was following a steep performance decline of 40.3 per cent in 2022.

Total Emerging Markets and Asian hedge fund assets were both steady through the beginning of 4Q23, with emerging market assets under management estimated at $245.8 billion, while total capital invested in Asian hedge funds was also steady at $126.6 billion to start the fourth quarter.

There were mixed results in other emerging markets. 

The HFRI EM: MENA Index gained 3.9 per cent year-to-date through November, while the volatile HFRI EM: China Index fell 3.9 per cent year-to-date, after falling 19.3 per cent in 2022.  

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