In a Bad Year for Hedge Funds, These Are the Worst Performers

After sharp declines in October, emerging market hedge funds are on track to post their biggest losses since 2011.

Patricia Monteiro/Bloomberg

Patricia Monteiro/Bloomberg

With two months left to go, the worst-performing hedge funds of 2018 are those focused on emerging markets.

As of October, emerging market hedge funds had lost 10.71 percent for the year and were tracking toward their worst calendar-year performance since 2011, according to data from Hedge Fund Research. The larger hedge fund industry, represented by HFR’s fund-weighted composite index, was down 1.86 percent over the same period.

Both emerging and developed market hedge funds suffered in October, a month in which the Standard & Poor’s 500 stock index fell nearly 7 percent, wiping out much of the year’s gains. During this volatile month, emerging market hedge funds lost 3.74 percent, and HFR’s broader fund-weighted index declined by 3.15 percent — its sharpest monthly decline in seven years.

The worst area within emerging markets has been Asia, with hedge funds targeting India performing particularly badly. According to HFR, Asia-focused hedge funds (excluding Japan) had lost 18.01 percent through October, while the research firm’s India index had fallen 26.83 percent.

China-focused hedge funds, meanwhile, fell 16.96 percent.

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“Volatility in emerging market hedge funds spiked in recent months as regional equity market losses in both emerging and developed markets accelerated,” said Kenneth Heinz, president of HFR, in a statement. “As a result of this volatility spike and performance declines, investors withdrew the largest amount of capital since 2009.”

According to HFR, investors redeemed a net $3.1 billion from emerging market hedge funds during the third quarter. The last time investors pulled that much money out of emerging market hedge funds was in the wake of the financial crisis, when investors redeemed more than $13 billion between the last quarter of 2008 and the first three months of 2009.

Overall, net hedge fund redemptions for 2018 increased to $11.1 billion during the third quarter of this year, after investors pulled out $9.1 billion more than they committed. Flows into hedge funds have been muted since early 2015, with outflows outweighing inflows in eight of the past twelve quarters.

Bright spots within the industry this year have included equity hedge strategies focused on healthcare and technology, which are up 10.55 percent and 6.19 percent, respectively. Relative value hedge funds are also up overall, gaining 1.81 percent for the year, while event-driven funds have managed to stay in the black, with a gain of 0.58 percent year-to-date.