Three years ago Roland Nash, one of the most astute
economists and investment strategists in Russia, quit
Moscow-based investment bank Renaissance Capital to join tiny
Verno Capital, a specialist start-up focused on emerging
Weve got lots of new money looking at emerging
markets the money that used to be invested into the U.S.
or European countries, Nash said at the time in an
interview with Russian television network RT. Since
then, the flows have only gotten greater.
In the quarter ended December 2012, according to
Chicago-based hedge data firm HFR, hedge fund capital invested
in emerging markets rose $11.2 billion to a record $139
billion. HFRs HFRI Emerging Markets Index gained more
than 10 percent for all of 2012, including a gain of 4.8
percent in the fourth quarter, with contributions across each
of the BRIC economies, representing an increase of R$272
billion in Brazil, RUB 4.2 trillion in Russia, 7.5 trillion
rupees in India and 867 billion yuan in China.
Easy monetary policy in developed markets drove the
emerging-markets gains and capital flows, says Kenneth Heinz,
president of HFR. Indeed, net inflows into
emerging-markets-hedge funds accounted for $3 billion of the
net $3.4 billion that went into the global hedge fund industry,
Nash is confident that the flow will continue.
Youre looking at a group that is 55 percent of the
worlds [population], growing to 75 percent. With emerging
markets performing the way they have and only 5 percent of
institutional assets allocated to the emerging markets, I think
weve broken the mindset of asset managers, says
Nash. And once the mindset is broken and managers have made
that leap of understanding, there should be even bigger
Private capital inflows into emerging markets are also
expected to rise, to $1.12 trillion in 2013, up from $1.08
trillion in 2012, according to the Institute of International
Finance. The Washington, DCbased trade group for
financial institutions predicts private flows will increase to
$1.15 trillion in 2014. The flow of private capital is still
lower than in the period from 2005 to 2007, but monetary
conditions in mature economies and favorable growth in emerging
economies should continue the upsurge, the IIF predicts.
Quantitative easing and competitive devaluation are pulling
investors further out on the risk curve so that they are
comfortable with the risks of the emerging markets and the
concomitant rewards, explains Michael Tobin, a veteran
emerging-markets hedge fund marketer in New York. The
perception is that growth in the developed markets is
flatlining or dead, and anemic in the U.S., Tobin says.
Many emerging-markets economies that have underperformed in the
past are due for a rally, he adds.