EM Hedge Funds’ Struggle Continues

Emerging Markets hedge funds extended second quarter declines through August, according to indexation firm HFR, with losses again driven by exposure to Russian assets as well as the acceleration of global inflation, rising US interest rates and slowing economic growth.

Tracking unprecedented volatility concurrent with the ongoing military conflict in Ukraine, after falling more than 50% through April, the HFRI EM: Russia/Eastern Europe Index surged 26.8% over the following three months, paring the year-to-date decline to 37.4% through mid-Q3.

After seven consecutive months of declines to start the year, the HFRI Emerging Markets (Total) Index posted its first monthly gain for 2022 in August, advancing 0.75% and paring the year-to-date decline to -12.5%. Total Emerging Markets hedge fund assets declined to $249.7 billion in Q2 2022, down nearly $27 billion from the year end 2021 AUM record of $276.4 billion.

While Russian-focused hedge funds plunged to begin 2022, other emerging markets regions posted moderate declines driven by surging global inflation and the US Dollar. The HFRI EM: Latin America Index is down 0.7% year-to-date through August, while the HFRI EM: MENA Index has fallen 3.7%, and the more volatile HFRI EM: China Index has plunged 19.6%. Total capital invested in Asian hedge funds fell to $130 billion in Q2 2022, down from $138.8 billion to end 2021.

Hedge funds with high exposure to cryptocurrency across EM regions including Korea, Russia, China, and the Middle East (as well as Japan) have continued to navigate soaring volatility and steep declines, with the HFR Cryptocurrency Index plunging 45.1% year-to-date through August; this despite surging 18.6% in July 2022 and by a massive 240.6% in 2021.

“Soaring global inflation and the surging US Dollar, combined with unprecedented geopolitical and macroeconomic volatility, have resulted in EM volatility eclipsing records, with the volatility persisting and accelerating throughout the first eight months of 2022,” says Kenneth Heinz, president of HFR. “Hedge funds focused on emerging markets have navigated these massive dislocations and powerful trends, tactically managing volatility, positive currency positions, and opportunistic equity, fixed income, and commodity exposures.

“With global inflation accelerating and monetary response increasingly uncertain, EM managers continue to position for currency-driven volatility with increased risk of dislocations and interventions, as these powerful and fluid trends persist and evolve,” he continues. “Leading global institutions and investors looking to preserve capital and identify opportunities in EM and cryptocurrency hedge funds are likely to drive capital growth and recovery into year end.”