WEST PALM BEACH, FL (HEDGECO.NET)-
Emerging market hedge funds who are investing in Exotic stocks, collectively labeled B.R.I.C. such as Brazil, Russia, India and China, are seeing some stormy weather ahead. Charles Dallara, the head of the lobby group that represents the world’s biggest international financial institutions said, “We are moving into a period of vulnerability for emerging markets . . . global markets are going to get a bit choppy.”
His comments come after a three-week sell-off in emerging market assets, and amid concerns over a number of countries including devaluations and market turmoil this week in Turkey, Hungary, and Indonesia.
The recent and sudden input of new money especially from hedge funds which are now among the largest shareholders of companies in Turkey, Argentina, and Mexico may not have the experience to withstand the unstability of these markets. Investors poured almost $340 billion into hedge funds globally during the past five years, increasing the industry’s assets to $1.3 trillion, according to Hedge Fund Research.
Preliminary figures released yesterday by Chicago-based Hedge Fund Research Inc. show that the HFRI Emerging Markets (Total) index had its worst month since September 2002. The index, which tracks funds investing in equities or sovereign debt of emerging countries in Asia, Africa, Eastern Europe, and Latin America, returned 10.7 percent in the first five months. The Morgan Stanley Capital International Emerging Markets Index also dropped 10.8 percent in May.
Emerging markets in general are much more resilient today than they were a decade ago, but the IIF believes that much of the inflow of funds in recent years was driven by a “search for yield” at a time of ultra-low interest rates in the developed world. As interest rates rise in the US, Eurozone, and Japan this trade has come under pressure. The IIF are a group of investors whose members include Citigroup, JPMorgan Chase, HSBC, Deutsche Bank, UBS, and Credit Suisse.
Some hedge funds investing in emerging markets lost 3.98 percent in May as stock markets from India to Chile slumped, suggesting managers need to increase their hedging to weather the current sell-off in shares.
Hedge funds focusing on Eastern Europe and the former Soviet Union suffered the most last month, dropping 5.98 percent, according to Hedge Fund Research. Asia-focused funds shed 3.63 percent. The Latin America index fell 1.56 percent.
Alex Akesson
Contributing Writer
HedgeCo.Net
Email: Editor@hedgeco.net
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