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Emerging Market Hedge Funds Had Record Assets. Then the Pandemic Hit.

Emerging market hedge funds have not been spared from the coronavirus pandemic, new data from HFR show.

Emerging market hedge funds started the first quarter on a high note, with total capital invested hitting a new peak. Then the coronavirus pandemic arrived. 

According to new data from Hedge Fund Research, the volatility that fueled market declines in March and gains in April has resulted in year-to-date negative returns for emerging market hedge funds.  

“Coronavirus-driven pandemic volatility, which began in early 2020, accelerated and expanded through April to encompass not only regional emerging market equity and fixed income markets, but also commodity and currency markets, including volatile cryptocurrency markets,” Ken Heinz, president of HFR, said in a statement. 

HFR’s data shows that emerging market hedge funds began the year with a record $248.3 billion under management. “As financial markets volatility spiked and investor risk tolerance posted a historic decline,” total capital fell to roughly $232 billion, the report said.

This is still higher than the estimated $221.93 billion run by emerging market hedge funds at the start of 2019, according to HFR.

The data firm’s emerging market hedge fund index has declined 10.2 percent this year, including a 14.78 percent drop in the first quarter. The index fell 12.4 percent in March before gaining 5.4 percent in April, according to HFR.  

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“EM hedge funds have tactically and effectively navigated these historic dislocations, mitigating volatility through the March declines while positioning for the recovery across EM assets,” Heinz said in a statement. 

Year-to-date, HFR’s emerging market index for Latin American hedge funds performed the worst, falling 26.89 percent since January 1.  Meanwhile, the hedge fund tracker’s China emerging market index lost the least, dropping 3.07 percent. None of HFR’s regional emerging market indices recorded positive year-to-date returns for hedge funds.

As for the strategies targeted in these regions, HFR reported that most emerging market hedge fund assets are invested in equity hedge strategies — 60.71 percent, according to the report. This is much higher than in the larger hedge fund industry, where has 28.22 percent of capital is invested in equity hedge strategies. 

Among emerging market hedge funds, event-driven, macro, and relative value strategies each make up less than 20 percent of total assets under management, according to HFR.  

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