PrevInvest On EM Funds And The Cycles Of Hype

by: AllAboutAlpha

PrevInvest’s latest report reviews the recent performance and the problems of those hedge funds that employ an emerging-markets strategy.

Recent performance is not inspiring. Over the 36 month period ending with June 2013, the average performance of the 253 EM hedge funds in PrevInvest’s database was just 12.67%. That contrasts unfavorably with the S&P 500 TR Index increase of 66.20% in the same period.

Also, the MSCI World TR Index USD increased 49.57% in that period.

Going Out to 10 Years

In none of the medium time frames presented, from 12 months to 60 months, did the pattern differ. The developed nations’ long-only equity indexes are consistently producing performance superior to that of the EM funds. Only if you go out to 10 years does this turn around.

Another important fact, though, that may somewhat mitigate the significance of that one: there is a good deal of performance diversity by region. In the 12-month period, Asia (ex-Japan) EM funds did best, while those dedicated to India did quite poorly (+15.70% in the former case, -0.75% in the latter).

Over a 36-month period, the Africa-focused funds look good (+26.42% return) while India again looks bad (-21.29%).

It obviously isn’t raw return that allows EM funds to continue to receive the investments of sophisticated institutions. Their appeal consists of their low correlation. The EM hedge fund average was 0.47 correlated against the S&P 500 TR index over the last 6 month period, and less than that, only 0.27, over 12 months.

The report discusses some of the challenges that EM funds have faced and continue to face, notably the continued uncertainty about the policy of the U.S. Federal Reserve. PrevInvest cautions that investors should expect continuing uncertainty and resulting volatility in both the EM debt and EM equity classes.

Good News on China

PrevInvest also discusses China’s slowing GDP growth, and on this point its view runs somewhat contrary to the emerging conventional wisdom. One reason is that retail sales data beat forecasts. This is important because “China is trying to sustain economic growth through a rebalancing toward domestic demand rather than excessive investment,” so the retail numbers indicate a move toward a more sustainable pattern for the PRC.

PrevInvest also finds good news on China’s labor front. In the second quarter there were 6.1 million jobs available, and 5.7 million job seekers, a 1.07 post-to-seeker ratio, according to a survey of job centers across the country.

Another fact: at the end of June, the People’s Bank allowed short-term borrowing costs to spike up to record highs. This sent a healthy message to the banking system in China that banks can’t any longer count on cheap cash from the central bank to fund ever riskier operations.

Cycles of Hype

China is one of the four famous BRIC nations, along with Brazil, Russia, and India. The BRICs as a group have been a disappointment to those who thought they were at a take-off point at the turn of the millennium. It was in November 2001 that Jim O’Neill of Goldman Sachs issued a paper that contended that the BRICs were poised to expand much more rapidly than were their developed counterparts. The euphoria is now abating even at Goldman Sachs itself.

In the cycles of investment-marketing hype, BRICs have been replaced by the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa).


PrevInvest cautions that “as in the case of BRIC group of countries, CIVETS are exposed to swift changes in investor sentiment.”

As the above graph indicates, the performance of an S&P index tied to the BRICs (the red line) has been somewhat less impressive over the last three years than an S&P index tied to the CIVETS (the blue line). But both lines have very marked ups and downs.

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