Emerging Markets Hedge Funds See First Gains Since January

Hedge funds targeting developing economies have navigated market volatility to stem this year’s losses.

(Dhiraj Singh/Bloomberg)

(Dhiraj Singh/Bloomberg)

Hedge funds focused on emerging markets may have hit a turning point in July, producing their first gains in six months.

Many were defensively positioned before recent currency declines in developing countries weighed on markets, helping investment managers to eke out an average 0.3 percent return in July, according to a Hedge Fund Research report Friday. That was the first monthly gain since January, trimming this year’s losses to about 3.4 percent.

Hedge funds have steered through market volatility in search of arbitrage opportunities that will likely drive strong gains in the second half of this year, according to HFR. Bond and stock markets have been rattled this year in part by U.S. trade tensions with China and economic turmoil in Turkey.

“Emerging markets hedge funds navigated extreme dislocations through mid-2018 as trade tariff negotiations and pressure accelerated and combined with other political situations contributing to a dramatic fall in the Turkish Lira,” said Kenneth Heinz, HFR’s president, in the report.

Steep declines in other currencies, including the Russian ruble and Brazilian real, have added to market volatility, Heinz said. While hedge fund managers focused on developing economies showed an improvement in performance last month, they have continued to trail the broader industry for most of the year.

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The $3.2 trillion hedge fund market, including all strategies and regions, produced a 1.35 percent gain this year through July, according to HFR. Among hedge funds targeting emerging markets, investments in the Middle East and North Africa have seen the strongest performance.

HFR’s MENA index returned about 5.9 percent in the first seven months of 2018, the report shows, with the Russia/Eastern Europe Index posting the next best gains at 0.3 percent. The rest of the developing markets tracked by HFR, including India, Latin America, and China, have produced losses this year.

Still, hedge funds managers have maintained a near record level of emerging-markets assets, overseeing a total $231 billion at the end of June. That’s down 1 percent from an unprecedented $234 billion in the first quarter, the report shows.

Tumultuous markets may well turn out to be a boon for hedge fund managers this year — particularly those who have invested through market cycles, according to Heinz.

“For experienced EM hedge funds, equity and currency losses, as well as increased market volatility, have created valuable opportunities as arbitrage spreads widen,” he said.