Emerging market hedge funds “position for recovery” as invested capital shrinks

Submitted By Hugh Leask | 30/05/2020 - 10:21am -

Hedge funds that trade emerging markets mounted a partial comeback last month following bruising double-digit losses earlier – but total invested capital in EM funds tumbled as the coronavirus crisis took its toll.

Emerging market hedge fund strategies added 5.4 per cent in April, according to new data from Hedge Fund Research.

The returns – which were driven by gains amid the historic equity, fixed income and commodity market volatility – represent a partial recovery for the sector after the HFRI Emerging Markets (Total) Index lost 12.4 per cent in March.

Overall, EM-focused hedge fund managers were down more than 10 per cent in the first four months of 2020, having posted an 11.8 per cent annual gain in 2019.

As well as regional equity and fixed income turbulence amid the Covid-19 spread, EM hedge funds have also grappled with historic volatility in commodity markets, protracted production wrangles, and negative prices in oil futures in recent months, HFRI noted.

Total capital invested in EM hedge funds fell from a record USD248.3 billion in Q1 this year to USD232 billion as market volatility spiked, spooking investors, HFR’s ‘Asian Hedge Fund Industry Report’ and ‘Emerging Markets Hedge Fund Industry Report’ showed.

The HFRI EM (Total) Index measures the performance of hedge funds trading securities and sovereign debt of emerging market regions including Africa, Asia ex-Japan, Latin America, the Middle East and Russia/Eastern Europe.

“Coronavirus-driven pandemic volatility, which began in early 2020, accelerated and expanded through April to encompass not only regional emerging market equity and fixed income markets, but also commodity and currency markets, including volatile cryptocurrency markets,” said Kenneth Heinz, HFR president.

Commenting on the data, Heinz suggested that managers who have generated gains during the historic Q1 maelstrom will likely lead industry performance in the coming quarters. 

“EM hedge funds have tactically and effectively navigated these historic dislocations, mitigating volatility through the March declines while positioning for the recovery across EM assets, commodities and currencies/cryptocurrencies in April and extending into mid-2020.”

Analysts at Man Group, the London-headquartered, publicly listed global hedge fund giant, said this week that emerging market equities could strengthen as the global economy gradually emerges from lockdown and international trade flows accelerate.

On Monday, the World Health Organization warned that Latin America risks becoming the new epicentre of the ongoing coronavirus crisis, amid a recent surge of Covid-19 cases in Brazil, a key emerging market economy.

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