11/17/2016 Market Commentary

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HFRI Latin America Index gains accelerate into 4Q; Russia, China also gain as Pound Sterling falls
CHICAGO, (November 18, 2016) – Emerging Markets (EM) hedge funds ended the third quarter at a new record asset level, eclipsing the prior record from 2Q15. Assets dedicated to EM hedge funds increased to $199.66 billion in 3Q (1.37 trillion RMB, 687 billion Brazilian Real, 13.5 trillion Indian Rupee, 12.9 trillion Russian Rouble, 748 billion Saudi Riyal), up $9.8 billion from the prior quarter as a result of strong performance-based quarterly gains and despite a net investor outflow of $850 million, according to the latest HFR Emerging Markets Hedge Fund Industry Report, released today by HFR®, the established global leader in the indexation, analysis and research of the global hedge fund industry.
The HFRI Emerging Markets (Total) Index gained +5.06 percent in 3Q and added +1.10 percent in October, led by regional exposures to Latin America, Russia, and Emerging Asia; the HFRI EM Index is up +9.1 percent YTD through October.
Hedge funds focused on Latin America extended the powerful YTD surge, leading all areas of hedge fund performance through October. The HFRI EM: Latin America Index vaulted +6.2 percent in 3Q, and added another +5.4 percent in October, bringing YTD performance to +33.0 percent. Recent gains for the volatile LatAm Index follow performance declines in four of the last five years, including the last three. The total number of hedge funds focused solely on investing in Latin America remained at 107, while total capital increased to $6.7 billion in 3Q.
Hedge funds investing in Russia and Eastern Europe also posted strong gains, with the HFRI EM: Russia/Eastern Europe Index gaining +6.5 percent in 3Q16 and +1.0 percent in October, increasing YTD performance to +20.7 percent, driven by gains in both Russian equities and the Rouble. As of 3Q, over 170 hedge funds were regionally focused on Russia/Eastern Europe, with these managing an estimated $28.9 billion.
Emerging Asia performance was led by the HFRI China Index, which advanced +7.3 percent in 3Q, fully erasing the decline from the first half of the year to post a narrow gain through 3Q. The HFRI China Index topped the Shanghai Composite Index by over 480 bps in the third quarter, and by over 1500 bps YTD through 3Q. The HFRI India Index jumped +7.6 percent in 3Q and added +1.3 percent in October, bringing YTD performance to +7.8 percent. Total hedge fund capital invested in Emerging Asia increased to $50.6 billion in 3Q, as over 520 funds remain focused on the region.
The only regional area of EM performance to suffer a decline in 3Q was the Middle East, as the HFRI MENA Index fell -0.5 percent in the quarter before rebounding +2.0 percent in October, settling YTD performance at -4.7 percent thus far in 2016. An estimated 50 hedge funds are currently focusing their exposures in the MENA region, with total capital at approximately $4.3 billion.
“Emerging Market hedge fund capital increased to a record level in 3Q as currency, fixed income and commodity markets adjusted to the impacts of shifting trade and monetary policies from both Brexit and the U.S. election,” stated Kenneth J. Heinz, President of HFR. “As regional EM equity markets have surged, EM hedge funds have effectively complemented these directional gains and mitigated risks with tactical, non-directional trades created by shifting policies and temporary dislocations. The coming period of US and UK trade and monetary policy adjustments are likely to produce compelling opportunities for EM hedge funds, extending their performance leadership and capital expansion into 2017.”