Hedge funds exposed particularly to Russia and Eastern Europe have been slammed. Those with other emerging market links have posted more mixed results. Across the industry as a whole, however, macro funds have gained ground.

A barometer of hedge funds' performance has shown that funds exposed to emerging market countries extended their first-quarter drop through May this year, with the collapse in Russian assets proving to be a particular blow.

Hedge Fund Research said that its Emerging Markets (Total) Index fell for five months in a row from January, falling by 10.2 per cent. The HFRI EM: Russia/Eastern Europe Index plunged -50.6 per cent year-to-date through April before rounding up to 14.7 per cent in May to pare year-to-date losses to -43.3 per cent. 

Russian assets had plunged in value as the stock exchange closed and the rouble posted steep losses before regaining some of the losses as the Russian Stock Exchange partially reopened. The US, the European Union and a range of nations imposed sanctions on Russia after its invasion of Ukraine in late February. Among a variety of measures, Russia was ejected from the SWIFT banking system. The economic disruption to Russia was underscored in recent days by Moscow’s foreign debt default on $100 million of interest due on 27 May, but extended to 26 June on a 30-day grace period. While Russia has considerable resources, the default harms its credibility in dealings with global financial markets. This is understood to be the first Russian debt default since 1998.

“Emerging market hedge funds have navigated unprecedented geopolitical and macroeconomic volatility across asset classes with the dual catalysts of the Russian invasion of Ukraine, as well as generational inflation, which has also resulted in rising interest rates, soaring commodity prices, supply chain constraints and a slowing global economy,” Kenneth Heinz, president of HFR, said.

“As of mid-year, these financial market risks remain both fluid and highly uncertain, with ongoing military conflict in Russia, expectations for continued interest rate increases and continued economic slowing. Leading global institutions and investors looking to preserve capital and navigate this volatility and to identify opportunities in EM and cryptocurrency hedge funds are likely to drive capital growth and recovery in 2022,” Heinz said. 

Perfect storm
Chicago-based HFR said that emerging market hedge funds have also been hit by rising US interest rates, weakening global economic growth and inflationary pressures. 

The investable HFRI 500 Fund Weighted Composite Index, which includes funds across all regions in both emerging and developed markets, fell 1.4 per cent year-to-date through May, with gains in uncorrelated macro strategies offset by declines in beta equity hedge exposures. 

The HFRI 500 Macro Index has risen by 14.3 per cent year-to-date through May, while the HFRI 500 Equity Hedge Index has declined 9.1 per cent over the first five months of the year.

While Russian-focused hedge funds plunged at the beginning of 2022, other emerging market regions posted mixed performance as oil prices spiked. The HFRI EM: Latin America Index advanced 6.9 per cent over the first five months of the year, while the HFRI EM: MENA Index fell 2.4 per cent, and the HFRI EM: China Index fell 17.6 per cent year-to-date through May. Total capital invested in Asian hedge funds fell to $134.9 billion in 1Q22, down from $138.8 billion to end 2021.

Hedge funds, which have high exposure to cryptocurrency across EM regions including Korea, Russia, China, and the Middle East (as well as Japan), have navigated soaring volatility and steep declines; the HFR Cryptocurrency Index plunged 35.3 per cent year-to-date through May. After this, the index vaulted 240.6 per cent in 2021.