EM Hedge Funds Thrive with Volatility Despite Negative ‎Returns in February

Emerging-market macro hedge funds returned 2.6 percent in the first ‎two months of 2018, paring part of January’s healthy gain after ‎incurring a loss of -1.4 percent in February, according to Hedge Fund ‎Research Inc.‎

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The downbeat results don’t mean investors are expecting an exodus ‎as a combination of U.S. import tariffs and ‎accelerating ‎inflation have buoyed leveraged funds ‎focused on developing nations toward their sixth consecutive quarterly ‎advance.‎

Demand for emerging-market macro hedge funds remains so brisk, ‎in fact, their capital increased to $230 billion as of February 2018, the HFR data shows. Meanwhile, ‎Global hedge fund capital began the year at a record $3.21 trillion.‎

Emerging-market hedge funds have posted such a strong ‎performance in large part due to new investments pumping into Russia/Eastern ‎Europe and the Middle East/MENA regions.

According to the report, the HFRI EM: Russia/Eastern Europe Index returned +5.5 percent YTD, narrowly paring the 6.2 ‎percent gain in January following a minor decline of -0.7 percent in ‎February. Total capital of funds investing in Russia/ Eastern Europe ‎increased to $32 billion across more than 170 funds in Q4 2017. ‎

Commenting on this, Kenneth J. Heinz, President of HFR, said ‎”Emerging Markets hedge funds were tactically positioned for the recent ‎increase in realized volatility pursuant to new proposals and negotiations ‎regarding trade agreements, tariffs and expectations for accelerating US ‎inflation.”

“While certain high-performance beta strategies from 2017 experienced losses as these trends ‎developed, EM hedge funds were able to tactically adjust positioning to take ‎advantage of specialized, EM-specific opportunities across equity, currency ‎and fixed income/inflation markets. As US inflation pressures continue to ‎build in 2018, it is likely that EM hedge funds will lead hedge fund industry ‎growth for investors looking for higher absolute performance with increased ‎volatility protection,”‎ he concluded.

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