Cheap money may have buoyed emerging-market macro hedge funds toward their ninth straight annual advance, but that doesn’t mean investors are expecting an exodus as the world’s central bankers start turning off the taps.
Demand for these funds remains so brisk, in fact, that some are turning new money away. Pharo Management (UK) closed one of its developing-economy macro pools to new clients after it made 25% this year through September. And Antoine Estier raised twice what he expected for his new Amia Capital venture, which invests across markets, closing part of the fund to additional clients, according to a person familiar with the matter.
Investors are speculating that hedge funds’ ability to bet on market gains and declines could shield money pools even if the withdrawal of a decade of quantitative easing hurts emerging economies. There’s speculation that a pullback of QE could derail the developing world’s recovery because much of the ultra cheap-money circulated by central banks found its way into these markets in search of higher yields.
“It’s definitely been a strong year for emerging-market macro funds,” said Philippe Ferreira, a Paris-based senior cross-asset strategist at Lyxor Asset Management, which oversees about $35 billion in so-called alternative strategies.
Lyxor is “defensive” on the developing world as a whole as it weighs the impact of an end to QE, yet it remains bullish on macro funds investing in these economies, Ferreira said. The firm may increase allocations next year, “provided central-bank normalisation is well absorbed by emerging-market assets, which looks increasingly likely,” he said.
The Federal Reserve has about a 90% chance of raising interest rates again next month, futures prices suggest, while the Bank of England lifted its main rate last week for the first time in a decade, saying that any future increases will be gradual. The European Central Bank, while still adding stimulus, will cut its monthly debt purchases in half next year, and economists foresee a potential rate hike in 2019.
Yet most analysts remain optimistic that the economic recovery that’s underpinning gains in emerging-market hedge funds will continue for some time to come.
While richer economies are seen slowing in coming years, growth across emerging markets will accelerate to 5% by 2019, according to forecasts compiled by Bloomberg. Economies such as those in Africa and South America are also benefiting from a surge in the price of the commodities they export, and there’s been localised good news such as Brazil emerging from its worst-ever recession.
“The re-emergence of economic growth in several important countries points to improved fundamentals and bodes well for continued inflows” into emerging-market assets, said Charles Hallion, a money manager at Pharo in London. “The economic cycle is more mature in developed countries, and consequently opportunities there are less compelling.”
The average emerging-market macro hedge fund made 5% this year through October, narrowly beating the 4% gain for funds investing across the market, Eurekahedge data show. Longer term, the outperformance was more stark, with emerging-market funds returning 99% since the end of 2008, compared with 56% for the broader money pools.
One reason the gap isn’t bigger this year is the range of assets hedge funds invest in. Emerging-market stocks may have rallied about 30% in 2017 — almost twice the pace of their developed-world equivalents. But emerging-market bonds have largely stalled since September, and their currencies have recently given up much of this year’s gains.
Other emerging-market funds have, indeed, fared much better in 2017. Glen Point Capital, whose clients include George Soros, made 23% in the first nine months of this year by betting on emerging-market debt and currencies, a person with knowledge of its strategy said. It closed to new money in 2016, just after it launched.
Still, concerns are building that the emerging-market rally has gone too far and that interest-rate normalisation will make rich-world countries more attractive.
Emerging-market valuations are “becoming much too correlated to developed-world interest rates,” said Zev Marynberg, chief investment officer at Adar Capital Partners, an investment firm that specialises in Latin American and European markets. The firm made 34% this year through October, including a 9% gain last month, helped by sovereign-bond investments in Brazil, Ukraine, Ecuador, El Salvador and Honduras.
Emerging markets “will suffer the most” as the US and Europe raise rates, Marynberg said.
Macro hedge funds as a whole are seeing a resurgence of interest on speculation rate increases will stoke volatility and create more opportunities to make money. Investors allocated $15 billion to macro money pools through the end of September, the most of any hedge-fund strategy and more than wiping out 2016’s redemptions, according to eVestment data.
This, of course, is partly down to inflows into emerging-market funds — which have, as yet, lost little of their allure.
Amia’s fund has grown to about $1 billion since it began trading on June 1, the person with knowledge of the firm said. The macro money pool has ended its initial marketing and closed its so-called founder share class — which offers lower fees — to new investors. A spokesman for Amia declined to comment.
EDL Capital’s Global Opportunities Fund has seen assets grow by $250 million this year to $680 million, and new clients will be turned away when they reach $1.2 billion. The fund, which invests in both emerging and developed markets, made 7.1% this year through September.
It benefited from Indian rupee and Polish zloty investments as well as a bullish position on gold, which helped mitigate volatility created by North Korea’s recent missile tests, founder Edouard de Langlade said.
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