As emerging markets settled, October brought renewed growth of hedge fund capital invested in them, according to new data.

Emerging market hedge funds enjoyed strong performance in October as investors regained their risk appetite and boosted exposure to China and Russia, according to Hedge Fund Research.

After a rocky third quarter for the industry, the HFRI Emerging Markets Index rose 3.4 per cent in October, the first monthly increase since April. 

Total hedge fund capital invested in China fell by $5.6 billion in the three months to 30 September, ending the quarter at $51.1 billion and representing the largest quarterly asset drop since the final quarter of 2008. 

Last month, risk tolerance and liquidity appeared to return to emerging equity markets and the HFRI China index climbed 5.9 per cent, a five-month high, and the HFRI EM: Russia/ Eastern Europe Index was up 4.8 per cent after falling by over 20 per cent since April. Year-to-date through October, China's hedge funds gained 6 per cent; in Russia, they gained 8.4 per cent.

Latin American-focused hedge funds also experienced a pick-up in October, with the HFRI EM: Latin America Index growing 3.6 per cent. Year-to-date, it remained down -17.9 per cent but this was above the significant year-to-date decline of -36.9 per cent for Brazilian stock exchange Bovespa.

“October performance reflected only the beginning of a convergence between expectations for emerging and developed markets,” stated Kenneth Heinz, president of HFR. 

“While the outlook for hedge fund exposure globally has improved as a result of expectations for higher US interest rates, the outlook for EM hedge fund exposure is likely to improve significantly into year-end as a result of stabilising currency and energy markets, increased developed market demand, improved investor risk tolerance and moderate inflationary pressure. The combined effect of these is likely to extend recent EM hedge fund gains through year-end and into early 2016.”