08/17/2016 Market Commentary

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Brexit drives asset growth as global rates remain low, negative; Capital invested in Russian hedge funds surge
CHICAGO, (August 18, 2016) – Hedge funds investing in Latin America posted strong gains through mid-2016, reversing declines in four of the past five years, including the last three years, to lead all areas of hedge fund performance through the first half of 2016. The HFRI EM: Latin America Index surged +8.9 percent in 2Q, and added another +4.3 percent in July, to bring YTD performance to +24.4 percent for 2016, 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. 
Capital invested in Emerging Markets hedge funds rose to conclude 2Q16 as Brexit impact, stimulus measures and currency volatility dominated global financial markets through mid-year. Emerging Markets hedge fund assets increased to $189.8 billion (1.26 trillion RMB, 604 billion Brazilian Real, 12.7 trillon Indian Rupee, 12.2 trillion Russian Rouble, 712 billion Saudi Riyal) through mid-year, up $4.7 billion from the prior quarter, though down $1.5 billion from the YE 2015 asset total of $191.3 billion. Total capital invested in hedge funds globally also increased through mid-year, rising to $2.898 trillion (19.2 trillion RMB, 9.2 trillion Brazilian Real, 193 trillion Indian Rupee, 185 trillion Russian Rouble, 10.8 trillion Saudi Riyal). Through July, the broad-based HFRI Fund Weighted Composite Index® has gained +3.0 percent YTD, while the HFRI Emerging Markets Composite Index has advanced +5.2 percent over the same period.
The +24.4 percent YTD gain of the HFRI EM: Latin America Index represents the strongest 7-month performance period for the index since gaining +30.4 percent over the 7-months ending October 2009. Total hedge fund capital invested in Latin America increased to $5.9 billion, with the estimated number of funds remaining unchanged at 107. In addition to the LatAm gains, funds investing in Russia also posted strong performance, with the HFRI EM: Russia/Eastern Europe Index advancing +5.4 percent in 2Q16 and +14.7 percent YTD 2016 through July. Total hedge fund capital invested in Russia/Eastern Europe increased to $26.6 billion, an increase of over $1.1 billion from the prior quarter, managed by over 170 funds.
Hedge funds investing in Emerging Asia recovered early year losses, with the HFRI EM: Asia ex-Japan Index advancing +3.3 percent in July and bringing YTD performance to +1.0 percent, fully recovering the -9.7 percent decline over the first 2 month of 2016 and topping the sharp decline of -15.8 percent for the Shanghai Composite Index. Total capital invested in Emerging Asian hedge funds increased to $48.5 billion, managed by over 520 funds. The HFRI EM: MENA Index posted a narrow decline of -0.6 percent in 2Q16, though the Index has declined -6.8 percent YTD through July. Total capital invested in MENA focused hedge fund increased to nearly $4.0 billion, managed by nearly 50 hedge funds.
“Emerging markets capital increased through mid-2016, driven by strong performance in Latin America and Russia, as energy and commodity markets recovered, currency volatility spiked, and regional EM equity markets posted solid gains,” stated Kenneth J. Heinz, President of HFR. “EM hedge funds have successfully navigated gains in the US Dollar, Japanese Yen, and Swiss Franc, as well as Brexit-related declines in the British Pound Sterling. With developed market rates remaining suppressed by stimulus measures through mid-year, specialized hedged EM exposures represent a compelling opportunity for global investors, benefitting from either continued low rate environment or increasing global inflation.”
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