Hedge fund capital invested in Emerging Markets (EM) posted a narrow gain for the third quarter as EM, Currency and Commodity Volatility all increased driven by a continuum of geopolitical and macroeconomic developments. Total hedge fund capital invested in EM hedge funds increased to $185.15 billion (1.13 trillion RMB, 475 billion Brazilian Real, 8.58 trillion Russian Rouble, 694 billion Riyal, 11.5 trillion Indian Rupee), according to the latest HFR Emerging Markets Hedge Fund Industry
Report, released today by HFR®, the established global leader in the indexation, research and analysis of the global hedge fund industry. Despite the small increase of $700 million from the end of the second quarter, EM hedge fund capital again reached a new record level. Net inflows of $300 million offset outflows of $200 million from the prior quarter; EM hedge fund inflows have totaled $3.5 billion YTD through the end of Q3, nearly half of the $6.45 billion in inflows from 2013.
The HFRI EM: Russia/Eastern Europe Index fell -8.3 percent in 3Q14 as Russian equities posted steep declines and the Russian Rouble breached a historic low of over 46 versus the U.S. Dollar. Hedge funds investing in Russia extended losses into the early fourth quarter, bringing YTD performance for the Index to -12.0 percent, although these losses still top the YTD decline of Russian equities by 1200 basis points. Total hedge fund capital invested in Russia fell to below $25 billion as of the end of Q3 across approximately 170 hedge funds.
The HFRI EM: Latin America Index declined -5.4 percent in 3Q14 as the Brazilian Real fell to a 10-year low against the U.S. Dollar. Third quarter losses offset gains from the first half of the year, bringing YTD performance for the Index through October to a decline of -3.5 percent. Total hedge fund capital invested in Latin America declined to below $11 billion, across approximately 110 hedge funds.
Partially offsetting these declines, hedge funds in Emerging Asia and the Middle East have posted gains recently, increasing the EM capital base in these regions. The HFRI EM: India Index gained +4.0 percent in 3Q14 and has extended gains into early 4Q, bringing YTD performance through October for the Index to +41.9 percent, leading all regional hedge fund indices. In contrast to Russia and Brazil, India-focused hedge funds have generated recent gains despite the Indian Rupee falling to historic lows against the U.S. Dollar.
Similarly, the HFRI EM: China Index gained +2.8 percent in 3Q and +1.7 percent in October, bringing YTD performance to +2.7 percent. Total hedge fund capital invested in Emerging Asia increased to nearly $50 billion, an increase of $4 billion since year-end 2013. The HFRI EM: MENA Index gained +3.9 percent in 3Q14, though a decline in early 4Q reduced YTD performance for the Index to +7.2 percent; nearly 50 hedge funds managing over $4 billion invest with a specific regional focus on the Middle East.
“Emerging Markets hedge funds have experienced intense pressure recently as a result of sharp local currency depreciations and falling oil prices, tactically utilizing short exposure and sophisticated strategies to mitigate downside volatility and monetize opportunities created by fluid dislocations,” stated Kenneth J. Heinz, President of HFR. “Falling foreign currency reserves, higher import costs and lower oil revenue have increased the EM risk paradigm into year end, resulting in greater macroeconomic and geopolitical uncertainty, but also increased opportunity across Emerging Markets. EM hedge funds typically experience a sharp performance recovery following periods of market stress, and investors which maintain or increase allocations in the current environment are likely to benefit in coming months and quarters from this recovery.”