EM Hedge Funds Start 2023 in Strong Fashion: HFR
Posted by Colin Lambert. Last updated: March 27, 2023
Emerging Markets hedge funds have had a strong start to 2023, according to hedge fund indexation firm HFR, which says they extended fourth quarter 2022 gains driven by rising US rates and continuing generational inflation.
The HFRI 500 Emerging Markets Index jumped 4.9% in January, with gains across equity hedge and cryptocurrency exposures, according to the HFR Asian Hedge Fund Industry Report and the HFR Emerging Markets Hedge Fund Industry Report from HFR.
EM hedge funds continued to navigate unprecedented uncertainty associated with the ongoing military conflict in Ukraine, with the HFRI EM: Russia/Eastern Europe Index falling 11.9% in December 2022, bringing the full year 2022 decline to -40.3 percent; the index was up 2.1% in January to begin 2023, however.
Regional emerging markets indices also posted gains to begin 2023, as the HFRI EM: Latin America Index rose 5.6% in January after posting a return of +0.35% for 2022, while the HFRI EM: MENA Index posted a narrow gain of +0.2% in January, following a decline of 4.2% in 2022. The volatile HFRI EM: China Index jumped 7.0% in January after falling 19.3% in 2022.
Hedge funds with high exposure to cryptocurrency across EM regions including Korea, Russia, China, and the Middle East (as well as Japan) posted a strong recovery from the extreme volatility and historic dislocation as a result of the FTX exchange collapse, with the volatile HFR Cryptocurrency Index surging 22.4% in January; this gain after the index plunged -54.0% in 2022.
Total emerging markets hedge fund assets began the year at an estimated $244.1 billion, an increase from Q3 2022, but still off the AUM record of $276.4 billion at year-end 2021. Total capital invested in Asian hedge funds fell to $125.3 billion to end 2022, down from $138.8 billion to end 2021.
“Extreme emerging market volatility continued to begin 2023, with Asian and cryptocurrency exposures surging on early signs of moderating generational inflation and pace of US rate increases,” says Kenneth Heinz, president of HFR. “Hedge funds focused on Emerging Markets and Asia have effectively navigated this unprecedented volatility in 2022, and have begun 2023 with strong strategic positioning.
“Trends of banking instability have now complemented the macroeconomic and geopolitical uncertainty, with EM managers continuing to position for the increased risk associated with a global recession, as well as strong recovery from cryptocurrency dislocations,” he continues. “Leading global institutions and investors seeking both capital preservation and opportunistic exposures to these trends are likely to increase exposures to specialised EM and cryptocurrency hedge funds through mid-2023 as mechanisms to access these powerful market dynamics.”