EM Hedge Fund scaled back

A sharp spike in investor risk aversion had a significant impact on hedge funds investing the emerging markets in the third quarter, when the HFRI Emerging Markets (Total) Index declined nearly 29%.

According to Hedge Fund Research, investors redeemed over $5.2 billion in capital from hedge funds investing in emerging markets during the same period. When performance-based asset losses are included, capital invested in emerging markets hedge funds fell more than 33% to almost $75 billion, less than 5% of all hedge fund capital and an absolute level not seen since end of 2006. Total capital invested in hedge funds globally has fallen by 19% over the same period.

Asset declines were widespread across all emerging market regions and strategies, but the most severe losses were in equity hedge funds, which lost over $23 billion in assets, and in funds focused on Russia and Eastern Europe, where assets fell by over $12 billion. But while emerging markets hedge funds have declined over 34% over the last 12 months, the losses have still not exceeded those from the financial crisis of 1997 and 1998, when emerging markets hedge funds declined over 43%.

Emerging Market underpinnings of secular growth and improved fundamentals were ignored and overwhelmed by fear and risk aversion. In a tumultuous flight to quality, investors looked to liquidate portfolios of any risky assets in favor of the perceived security of developed government bonds, and emerging markets hedge funds were some of the most heavily impacted by this.

Risk, of all types, was out of favor in the third quarter.