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.
The most exciting economic strength stories come from
emerging markets in Asia and Latin America, notes
Benjamin Pace III, chief investment officer for the Americas at
Deutsche Bank, in a recent report. And although
emerging-markets economies are not as decoupled from the
developed markets as many would like to believe, he writes,
the emergence process of the past 20 years has enabled
many emerging markets to build their own middle class and
domestic consumption, so they are not quite as reliant on
exports as they used to be.
You are looking at economic growth that is being
driven, in great part, by domestic demand, says Hiren
Ved, chief investment officer at Alchemy Capital, a
Mumbai-based long-short fund that manages nearly $500 million
in assets. As investors get more comfortable with the economic
infrastructures in emerging markets, the rate of investing will
naturally ramp up, says Ved, whose Alchemy India Long Term Fund
was up more than 42 percent in 2012.
Not all investors are increasing their allocations, however.
Since its launch in 2009, BTGs Global Emerging Markets
and Macro (GEMM) Fund has accumulated $5 billion in
emerging-markets-targeted assets, but now its managers believe
the markets might already be too saturated to generate alpha.
The bank says it has turned away about $500 million. 2013
is the year when we need to prove we can drive with a better
car [before we take on more assets], noted Antoine
Estier, GEMMs co-chief investment officer in a press
release earlier this year.
Nash, however, thinks that most investors will continue to
move into emerging markets. It is surprising that
emerging markets arent receiving an even greater
amount, he says. As institutions investing in
developed markets find it [increasingly] difficult to generate
sustainable returns for the short or the long term
they [will] recognize the opportunities for superior
returns from the emerging markets.
If emerging-markets assets once were seen as risky
assets, they are much less [risky] now.