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Hedge funds back in favour

Finance Blogger: Anthony Harrington Anthony Harrington

Hedge funds had a torrid time through the great crash of 2008/09. Even funds that considerably outperformed the mainstream equity markets (which lost 40% or so of their value) were not immune from investor panic and saw massive outflows as investors became wildly risk-averse, preferring near zero interest on Treasury bonds to any kind of risk-based strategy.

Hedge funds that got caught in the sub-prime fiasco, or that had invested heavily in credit default swaps, got caught between a rock and a hard place and many of them found no way out besides returning pence in the pound to dismayed investors.

However, that was then, and now is now. Today, according to the latest round of announcements by market watcher Hedge Fund Research, the sector is once again on the up and up. If 2008 was a year of record losses for those hedge funds specializing in emerging markets, the third quarter of 2009 has confirmed the extent of the turnaround those markets have achieved.

In the third quarter, hedge funds in this sector saw the value of their investments rise by $10 billion, taking the total investment in the sector by hedge funds to $86.5 billion. Where the HFRI Emerging Markets Index suffered a record 37.2% loss in 2008, in the period January 2009 to October 2009 the Index rose 36.4%. The bleeding of funds from the sector, which swelled to a torrent through the back end of 2008 and the first half of 2009, as investors fled emerging markets, slowed to a mere trickle in the third quarter, with net outflows of just $37 million.

One of the keys to this success, apart from the obvious buoyancy at present in emerging markets, many of which have resumed growth at levels which developed economies can only dream of, is specialization. The funds that are doing well tend to be focused on a specific market or region, either the Middle East and North Africa (MENA) or Latin America, but not both. According to Hedge Fund Research, there are now over 20 funds with an exclusive, dedicated focus on the MENA region, up by more than 50% in the last four and a half years. There are over 100 funds with an exclusive focus on Latin America. Eastern Europe and Russia are now home to some 3% of all emerging market hedge funds.

A really key milestone for the hedge fund sector as a whole (not just the emerging markets bit of it) is that during the third quarter of 2009 new launches of hedge funds exceeded the number of hedge funds being liquidated for the first time since the crash started, according to Hedge Fund Research.

Fourth quarter figures are still being put together, but already, by the end of the third quarter, 2009 had seen the launch of 554 new funds. To put this in context, the number of new launches still looks thin by comparison with the 1,400 new launches on average each year for the period from 2002 to 2007, but it shows that things are definitely moving in the right direction again for the hedge fund industry.

As we will see in a forthcoming blog, regulation, which was looming like a thundercloud over this new found prosperity now seems to be receding a touch. So all is looking bright once again for a sector that was mired in deep trouble at the start of 2009.

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Tags: asset price bubbles , economic recovery , financial crisis , hedge funds , losses
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