EM Hedge Funds Continue to Struggle: HFR

Emerging markets hedge funds extended first quarter declines through May, according to hedge fund indexing firm HFR, with losses driven by exposure to Russian assets as well as the impact of global inflation, rising US interest rates and slowing economic growth.

The HFRI EM: Russia/Eastern Europe Index plunged 50.6% year-to-date through April before rebounding to a degree, by 14.7% in May to pare those losses to -43.3%. Russian assets had plunged in value as the stock exchange closed and the rouble posted steep losses before regaining some of the losses as the exchange partially reopened. In addition to these geopolitical risks, global inflationary pressures increased to generational highs and the US Federal Reserve aggressively raised interest rates, HFR observes.

The HFRI Emerging Markets (Total) Index declined five consecutive months to start the year, falling 10.2% year-to-date through May, as reported in the releases of the HFR Asian Hedge Fund Industry Report and the HFR Emerging Markets Hedge Fund Industry Report.

The investable HFRI 500 Fund Weighted Composite Index, which includes funds across all regions in both emerging and developed markets, declined 1.4% year-to-date through May, with gains in uncorrelated Macro strategies offset by declines in higher beta Equity Hedge exposures.

While Russian-focused hedge funds plunged to begin 2022, other EM regions posted mixed performance as oil prices spiked. The HFRI EM: Latin America Index advanced 6.9% over the first five months of the year, while the HFRI EM: MENA Index declined 2.4%, and the HFRI EM: China Index fell 17.6% through May. Total capital invested in Asian hedge funds fell to $134.9 billion in the first quarter of 2022, from $138.8 billion at the end of 2021.

Hedge funds with high exposure to cryptocurrency across EM regions including Korea, Russia, China, and the Middle East (as well as Japan) have navigated soaring volatility and steep declines, as the HFR Cryptocurrency Index plunged 35.3% year-to-date through May, this after it was +240.6 percent in 2021.

“Emerging Market hedge funds have navigated unprecedented geopolitical and macroeconomic volatility across asset classes with the dual catalysts of the Russian invasion of Ukraine, as well as generational inflation, which has also resulted in rising interest rates, soaring commodity prices, supply chain constraints and a slowing global economy,” says Kenneth Heinz, president of HFR. “As of mid-year, these financial market risks remain both fluid and highly uncertain, with ongoing military conflict in Russia, expectations for continued interest rate increases and continued economic slowing. Leading global institutions and investors looking to preserve capital and navigate this volatility and to identify opportunities in EM and Cryptocurrency hedge funds are likely to drive capital growth and recovery in 2022.”