Emerging Markets

Emerging Markets - Investments

Emerging market investing started to take off when in the mid-1980s when the International Finance Corporation (IFC) set up the first mutual fund that invested solely in securities from emerging markets with a seed capital of around $50 million. Since 2002, assets managed by emerging market hedge funds have increased fourfold and in the first quarter of 2008, they managed approximately $110 billion, according to HFR.

Emerging market hedge funds are defined by the markets they operate in and not the strategies they follow. Thus, these funds are quite heterogeneous and adopt a variety of strategies such as equity long/short, event driven, global macro and fixed income arbitrage.

Emerging markets are defined quite broadly. Morgan Stanley describes an emerging market, as a country that is in the process of building a market-based economy. Others include ideas of large productivity gains from technological or political change. However, since the 1997-98 Asian financial crisis, the core characteristics of many emerging nations have changed fundamentally. Once, net importers of capital, emerging markets have now become net exporters of capital. Once heavily indebted, many emerging market governments have begun to reduce levels of external debt. These changes have contributed to the recent success and slightly lower volatility of many emerging market hedge funds. They have also resulted in the creation of entities such as sovereign wealth funds and have had a strong impact on international financial markets.

Emerging Markets Interview - Emerging Markets Research

Books Related to Emerging Markets

De Brouwer, Gordon. Hedge Funds in Emerging Markets. United Kingdom: Cambridge University Press, November, 2001.

This book tries to understand the role hedge funds played in exacerbating the Asian Financial Crisis of 1997 and 1998. While this question may not be interesting to most market players, the book also contains several case studies of how the financial crisis unfolded. These give some insight into the strategies hedge funds deployed in Asia during this period. However, the book is not a fun read and if you are interested in hedge fund strategies rather than the market risk posed by hedge funds, you have to carefully sift through the book for information.

Lhabitant, Francoise-Serge. Handbook of Hedge Funds. West Sussex: John Wiley & Sons, Ltd., 2006.

This is an excellent guide to the industry, with concise and informative descriptions on all of the major hedge fund strategies and primary methods to measure their risk and performance. Lhabitant also includes an overview of the legal environment of hedge funds and their organizational structure, while ending with a short guide to investing in them.

Emerging Market White Papers
Global Derivatives. Overview of Hedge Fund Strategies, November 2003.
Quick and dirty description of all major hedge fund strategies.

Odonnat, Ivan and Rahmouni, Imene. “Do Emerging Market Economies Still Constitute a Homogenous Asset Class?” Financial Stability Review, No. 9, Banque de France, December 2006

This paper provides a good synopsis on how the current and capital accounts of emerging markets have changed since the 1990s and describes how the composition of emerging market debt holders has changed. It also argues that while investors show increased signs of differentiating between emerging economies when considering portfolio allocations, disruptions may still cause a contagion effect due to the narrowness of the emerging markets and their dependence on the decisions of non-resident investors.

Strömqvist, Maria. “Do Emerging Market Hedge Fund Mangers Lack Skills?” Stockholm School of Economics, October 2006.

Strömqvist examines hedge fund returns from 1994 to 2004 and finds that emerging market hedge funds have underperformed non-emerging market hedge funds in terms of total and absolute return, while providing no diversification effects. The data is slightly outdated and includes the 1997-98 financial crisis, which significantly affects the results of the study. However, it provides an interesting statistics-based perspective on investing emerging market hedge funds.

Strömqvist, Maria. “Should You Invest in Emerging Market Hedge Funds?” Stockholm School of Economics, September 2007.

In this more recent paper, Strömqvist uses a the same data set from 1994 to 2004 to find that hedge funds were able to generate risk-adjusted return in the latter part of the period under study. She also finds that there is some differentiation in returns at the fund level, with successful funds continuing to generate above-average returns. However, she also finds that this does not result in increased capital inflows.

Information Sources

Emerging Markets Monitor

The Emerging Markets Monitor covers the latest events in emerging economies across fixed income, FX, commodity and equity asset classes, with short pieces that include analysis, forecasts and trade ideas.

Financial Crisis in Emerging Markets, NBER

Run by the National Bureau of Economic Research, this project examines the causes of currency crises in emerging market economies. As such, it contains a large selection of white papers that may be helpful to people interested in learning more about the financial markets in emerging economies.

HFR Emerging Markets Industry Report

The Institute of International Finance
Created in 1983, in response to the international debt crisis, the Institute of International Finance Inc is a global association of financial institutions. It collects a variety of data related to emerging markets and also generates independent research on the subject. Subscription is available only through registered member institutions and is not open to individuals.

The Journal of Emerging Market Finance, Sage Publications
This journal contains scholarly articles that cover practical and theoretical issues related to emerging markets.

Networking Events

Terrapin hosts an annual emerging market hedge fund conference

Tracking Tools

Credit Suisse Tremont Hedge Fund Index

CS/Tremont tracks provides registered users with historical data on the performance of variety of hedge fund strategies.

Short List of Emerging Market Hedge Funds

Axiom Investment Management (Hong Kong) - emerging markets hedge fund focused on Asia.
Farallon Capital Management
Horseman Capital Management
Marathon Asset Management
Moon Capital Management
Moore Capital Management - Moore Emerging Markets
Sloane Robinson - SR Global Fund Emerging Markets, SR Vista Emerging Markets
Thames River Capital (United Kingdom)
Tudor Investment

Guest Post by Sharini Kulasinghe

Free Daily Hedge Fund Newsletter

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Tags: Emerging Markets, Emerging Market, Emerging Market Fund, Emerging Market Index, Emerging Markets Funds, Emerging Markets Equity, Emerging Markets ETF, Global Emerging Markets, Emerging Market Bond, Emerging Markets Capital, Emerging Markets Investment

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