The emerging markets hedge fund strategy posted the worst returns of any strategy in 2011, with a yearly cumulative return of -10.8%, according to EDHEC-Risk Alternative Indexes. The MSCI Emerging Markets Index dropped nearly 20% last year.
But that does not signal the end of the emerging markets boom.
In its yearly review of its depositary receipts business, J.P. Morgan said rising inflation is a growing concern in emerging markets, although companies in emerging markets are continuing to raise capital in greater numbers from the U.S., Western Europe and Asia through DR programs.
And TABB Group has speculated that interest in emerging markets will continue, although the focus on the BRIC markets (Brazil, Russia, India and China) may fade as CIVETS countries (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) make their way into the spotlight. Those markets saw inflows of $10 billion in 2010 and most posted double-digit equity returns.
For hedge funds invested in emerging market stocks, there may be some good news. Morgan Stanleys emerging markets strategist told Bloomberg in November that emerging market stocks could rise 40% by the end of 2012, particularly Chinese stocks, which he expected to rise as inflation comes down. The MSCI Emerging Markets Index has risen 80 points to 980 in the past month.
Still, most hedge fund strategies were down last year. Long/short equity (-6.0%) and funds of funds (-5.9%) were the second and third worst performers, respectively, according to EDHEC-Risk. Short selling recorded the greatest returns at 6.5%, followed by fixed income arbitrage (3.9%) and merger arbitrage (2.0%).
(CG)