Can the bull run for emerging markets last? Or is the sector headed for a repeat of the late 1990s crisis, taking the hedge funds that bet on the emerging markets with it?
Hedge funds focusing on emerging markets have grown over tenfold from $2.6bn in October 1998 to almost $32bn in November 2006, according to research from Credit Suisse/Tremont. Assets under management measured by their emerging markets hedge fund index increased by 19.4 per cent after the sell off in May last year, compared to an almost 50 per cent drop in the 12 months to October 1998, amid the Asian financial crisis.
Emerging market funds performed better in 2006 than during the two years to July 1998, exhibiting higher and less diffuse returns suggesting a less volatile market environment. Increased flows of institutional money into funds, as opposed to from wealthy individuals and families, could be depressing general risk appetite, Credit Suisse/Tremont suggests, with steadily falling levels of volatility over the past three years.
Their conclusion: that May’s downturn was a brief hiatus, and with economic growth prospects appearing in tact with healthy fundamentals, the hedge funds/emerging markets love affair looks set to continue.
