HFR: Hedge Funds Invested in China, Russia Leading Volatile EM Returns

Hedge funds invested in China and Russia have returned to industry-leading performance, driven by a recovery in the Russian ruble, higher oil prices, and a surge in equity trading in China, according to the latest HFR Emerging Markets Hedge Fund Industry Report.

As a result of these developments, hedge funds investing in Russia and China have posted strong gains in recent months. The HFRI EM: Russia/Eastern Europe has gained nearly 20% since the start of February, while the HFRI EM: China Index has booked 19.2% for the year-to-date through April.

Despite the volatility that characterized 2014, total hedge fund capital invested in emerging-market hedge funds increased to nearly $190 billion in the first quarter, with performance contributions seen primarily in Russia and Equity Hedge strategies.

Total capital invested in the global hedge fund industry grew to a record $2.94 trillion to begin the second quarter, slightly less than the $3.16 trillion estimated by data provider Preqin.

The HFRI EM: Russia/Eastern Europe Index nearly 20 percent gain between February and April was driven partly by a 15% gain in the price of oil, with which both Russian equity markets and the ruble are historically somewhat correlated. Accordingly, Russian stocks recovered nearly 11% and the ruble gained a whopping 36% against the U.S. dollar, according to HFR’s report.

The index fell 25.9% in 2014, making it the worst area of hedge fund performance last year and the third-worst on record for the volatile Index, which fell 59.4% in 2008 and 63.9% in 1998. Although clearly not for the faint of heart, HFR points out that despite this kind of volatility, the index has produced an annualized gain of 12.7% since 1994, leading most areas of hedge fund and equity market performance.

In China, the HFRI China Index has gained 20% over the first four months of the year, including a record monthly gain of 14.2% in April alone as trading volume soared due to the Hong Kong/Shanghai Stock Connect program and a drop in Chinese interest rates. Total capital of hedge funds investing in Emerging Asia increased to $52.5 billion.

The report also noted that Latin American funds have also posted strong gains, with the  HFRI EM: Latin America Index gaining 5.9% in April, also on higher oil prices and recovery of the Brazilian Real. However, April performance has not totally offset declines in January and March, leaving YTD 2015 performance for the index at a loss of -0.3%. Total capital invested in Latin American hedge funds fell by five percent in 1Q15 to $9.7 billion, according to HFR.

“Emerging Markets hedge fund capital entered 2Q15 benefitting from accelerating drivers of performance in China and Russia which underscore recent gains and indicate opportunities across regional EM currency, equity and commodity exposures,” stated Kenneth J. Heinz, President of HFR. “While risk and categorical volatility remain an inevitable component of EM investing, innovative hedge fund strategies have evolved to exploit market inefficiencies created by secular growth and economic volatility, representing a powerful mechanism for global investors to access these dynamic markets.”

Established in 1992, HFR produces the HFRI, HFRX and HFRU Indices, industry benchmarks for global hedge fund performance. HFR calculates over 100 indices of hedge fund performance ranging from industry-aggregate levels down to specific, niche areas of sub-strategy and regional investment focus.

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