Emerging markets hedge funds have benefited from the strong recovery of the Russian Rouble, higher oil prices, lowering of interest rates by the Chinese Central Bank, and a surge in trading volume on the Shanghai-Hong Kong Stock Connect program.
As a result of these, hedge funds investing in Russia and China posted strong gains in recent months, with the HFRI EM: Russia/Eastern Europe gaining nearly 20 per cent since the start of February, and the HFRI EM: China Index adding over 20 per cent YTD 2015 through April.
Despite volatility to conclude 2014, total hedge fund capital invested in Emerging Markets hedge funds increased to nearly USD190 billion in Q1 2015 (RMB1.18 trillion, RUB10.9 trillion), with performance-based contributions concentrated in Russia and Equity Hedge strategies, according to the latest HFR Emerging Markets Hedge Fund Industry Report by HFR. Total capital invested in the global hedge fund industry grew to a record USD2.94 trillion to begin Q2 2015.
The HFRI EM: Russia/Eastern Europe Index gained +19.2 per cent in the three-month period of February through April, as oil gained nearly +15 per cent, Russian equities recovered nearly +11 per cent and the Rouble appreciated by over +36 per cent against the US dollar. Recent gains follow sharp losses for each of these in 2H14, with the HFRI EM: Russia/Eastern Europe Index experiencing an eight-month drawdown of -27.0 per cent from July through January 2015. The Index declined -25.9 per cent in 2014, the worst area of hedge fund performance last year and the third-worst year for the volatile Index, which fell -59.4 per cent in 2008 and -63.9 per cent in 1998. Despite this intense categorical volatility, the HFRI EM: Russia/Eastern Europe Index has produced an annualized gain of +12.7 per cent since 1994, leading most areas of hedge fund and equity market performance. Total capital invested in Russian-focused hedge funds increased by 17 per cent in 1Q15 to USD25.2 billion (1.50 trillion Russian Rouble).
The HFRI China Index has gained +20.0 per cent over the first four months of the year, including a record monthly gain of +14.2 per cent in April, as trading volume on the Shanghai-Hong Kong Stock Connect program soared and the Chinese Central Bank reduced interest rates. Total capital of hedge funds investing in Emerging Asia increased to USD52.5 billion (325.5 billion RMB). Capital invested in hedge funds that allocate assets across Multiple Emerging Market regions increased to USD98.4 billion with the HFRI Emerging Markets (Total) Index advancing +7.4 per cent YTD 2015 through April.
The HFRI EM: Latin America Index also posted a strong gain of +5.9 per cent in April on higher oil prices and recovery of the Brazilian Real, though these gains were offset by declines in January and March, bringing YTD 2015 performance for the Index to a narrow decline of -0.3 percent. Total capital invested in Latin American hedge funds fell by five per cent in Q1 2015 to USD9.7 billion (31.3 billion Brazilian Real). Similarly, the HFRI EM: MENA Index advanced +3.4 per cent over March and April, offsetting early 2015 declines and resulting in a narrow gain of +0.6 per cent YTD 2015. Total capital of hedge funds investing primarily in the Middle East increased to USD4.1 billion (15.4 billion Saudi Riyal).
“Emerging Markets hedge fund capital enters Q2 2015 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,” says 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.”