Following regional volatility in Ukraine and Argentina, hedge funds invested in Latin America and Eastern Europe experienced sharp losses to begin 2014, according to the latest report from HFR.

Following regional volatility in Ukraine and Argentina, hedge funds invested in Latin America and Eastern Europe experienced sharp losses at the start of 2014, according to the latest report from Hedge Fund Research.

While the HFRI Emerging Markets (Total) Index gained +7.1 per cent in the final four months of 2013, the index declined by -2.5 per cent in January on weaknesses in Eastern Europe and Latin America.

The HFRI Emerging Market Russia/Eastern Europe Index gained +2.3 per cent in the fourth quarter, but fell -5.4 per cent in January, outperforming the broad market drop in Russia and Turkey, as social and civil unrest in Ukraine resulted in conflicts between protesters and government forces.

Meanwhile, the HFRI Emerging Markets Latin America Index saw its worst monthly decline since September 2011, falling -1.7 per cent in the fourth quarter and then declining -6.0 per cent in January, as the Argentine peso plunged over 20 per cent.

Total hedge fund capital invested in emerging markets increased by over $9 billion in the final quarter of 2013 to over $170 billion, with inflows for the quarter at $2.1 billion. For the full-year 2013, total hedge fund capital invested in EM increased by nearly $20 billion, on inflows of over $6.4 billion.

The HFRI Emerging Markets Asia ex-Japan Index gained +10.6 per cent in 2013 but declined -1.3 per cent in January. This compares to a decline of nearly -7.0 per cent of Chinese equities in 2013 -4.0 per cent in January. Hedge funds investing primarily in the Middle East rose +20.7 per cent in 2013 and +0.5 per cent in January 2014.

“Hedge funds investing in Ukraine and Argentina have been exposed to tremendous volatility in recent weeks, contributing to an intra-emerging market performance decoupling, with funds investing in emerging Asia, the Middle East and elsewhere in Latin America producing mixed performance through the recent EM-centric volatility,” said Kenneth Heinz, President of HFR.

“As developed markets continue to extract economic stimulus measures led by the U.S. Federal Reserve, it is plausible to expect continued volatility in EM in 2014; however, this volatility is likely to create opportunities for hedge funds well positioned to understand these situations and provide liquidity as these dislocations occur,” he added.