Investors Retreat From Emerging Market Funds
Monday, August 23, 2010

Emerging markets (EM) hedge funds experienced a net withdrawal of USD1.5bn in the second quarter of 2010, according to figures released on August 19 by Hedge Fund Research (HFR).

This represents the second consecutive quarter, and the seventh quarter in the last eight, in which EM hedge funds have experienced a net capital withdrawal. Combining Q2 outflows with performance-based losses, total capital invested in EM hedge funds declined by USD3.2bn, to end the quarter at just under USD95 bn.

HFR said that EM outflows reflect a significant decoupling from the overall hedge fund industry, which experienced a net capital inflow of USD9.6bn for Q2 2010, and a first half capital inflow of USD23bn. Combined with redemptions in excess of USD550m in the first quarter of 2010, investors have withdrawn over USD2bn from EM hedge funds in 1H10.

EM outflows were region-specific during the period; investors allocated new capital to hedge funds focusing on Latin America and the Middle East, while redemptions were concentrated in Russia and Emerging Asia. By investment strategy, EM funds in Equity Hedge experienced USD1.8bn in redemptions, which was only partially offset by inflows of USD320m to Macro EM funds.

The performance of commodity-focused hedge funds has also been adversely impacted by recent commodity market volatility, with the HFRX Commodity Index down 5.6% year to date through July. As both importers and exporters of individual commodities, most EM economies maintain characteristic sensitivities to commodity price movements which can be detrimental, beneficial or variable, depending on the specific economy and price movement. Despite broad divergences across different commodity markets, hedge funds focused on metals, agricultural and energy commodities have all experienced negative performance in the year to date, 2010, HFR noted.

“Changes in global growth expectations, prospective currency volatility and commodity-specific market influences have resulted in a near term decrease in investor risk tolerance for Emerging Market hedge fund exposure,” said Kenneth J. Heinz, President of Hedge Fund Research, Inc. “While many of these risks have persisted into 3Q10, many powerful trends in EM equities, sovereign credits and commodities have also reversed; hedge fund investors considering the tactical, cyclical and overall positive performance dynamics of EM hedge funds will look to access these trends in coming quarters.”