Hedge funds investing in Latin America and Eastern Europe experienced sharp losses to begin 2014 even as the funds saw strong capital inflows from investors to start the year, according to the latest HFR Emerging Markets Hedge Fund IndustryReport. Total hedge fund capital invested in Emerging Markets increased by over $9 billion in 4Q 2013 to over $170 billion (Chinese RMB: 1.03 T, Brazilian Real 396 billion, Russian Rubble 6.04 T, Saudi Riyal: 637 billion, Indian Rupee: 10.55 T) with inflows for the quarter of $2.1v 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.
While the HFRI Emerging Markets (Total) Index gained +7.1 percent in the final four months of 2013, the Index declined by -2.5 percent in January on weakness in Eastern Europe and Latin America. The HFRI EM: Latin America Index posted a decline of -1.7 percent in 4Q, and then fell -6.0 percent in January, the worst monthly decline since September 2011, albeit outperforming sharp declines in Latin American equity markets, as the Argentine peso plunged over 20 percent. Similarly, the HFRI EM: Russia/Eastern Europe Index gained +2.3 percent in 4Q but fell -5.4 percent in January, also outperforming the broad market drop in Russia and Turkey, as social and civil unrest
in Ukraine resulted in conflicts between protesters and government forces.
Hedge fund performance across other Emerging Markets was mixed through both 4Q and early 2014, with the HFRI EM: Asia ex-Japan Index gaining +6.7 percent in 4Q and +10.6 percent in 2013, despite posting a decline of -1.3 percent in January. This compared to a decline of nearly -7.0 percent of Chinese equities in 2013 and a decline of nearly -4.0 percent in January. Hedge funds investing primarily in the Middle East posted gains in 4Q13, FY13 and January 2014, with the HFRX MENA Index gaining +5.2, +20.7 and +0.5 percent in each period, respectively.
EM hedge funds experienced inflows across most regions in 4Q, led by Emerging Asia, which experienced inflows of $1.1 billion, while funds investing in Latin America experienced a small outflow of $156 million for the quarter. For FY13, inflows were also led by Emerging Asia, which received over $3.0 billion of new capital, bringing hedge fund capital dedicated to Emerging Asia to over $45 billion.
“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,” stated Kenneth J. 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. As EM hedge fund capital has again surpassed record levels, global investors are clearly positioning with sophisticated, hedged strategies designed to preserve capital and capture opportunities created by these fluid situations.”