After being beaten up along with most hedge fund strategies in 2008, emerging markets hedge funds are roaring back this year along with the fortunes of their target regions.  Hedge Funds Review reports that,  “While prone to volatility, emerging markets hedge funds have historically posted strong gains following market bottoms. In the 12 months following the trough of each of the five largest performance declines, funds have produced an average gain of 23.3%.”

And Citigroup recently told Bloomberg News, “There is going to be an outsized investment back into Asia. Some of the big pensions are going to be looking at Asia; it’s coming onto the radar screens.”

We wondered if this was just a matter of emerging markets beta, or whether emerging markets hedge funds provide added value? For a perspective on this, we turned to our resident emerging markets expert, Peter Douglas, for more. As many of you are aware, Peter is the founder of Singapore-based hedge fund consultancy GFIA, and is a regular contributor to AllAboutAlpha.com.

Special to AllAboutAlpha.com by: Peter Douglas, CAIA, Principal, GFIA pte ltd.

For long-term investors, hedge funds are the most prudent approach to access the opportunities inherent in emerging markets.

Emerging market equity investing has typically been characterized by dramatic price movements through market cycles in both directions.  In addition, the inefficient, diverse and often rapidly developing nature of emerging capital markets creates challenges which can create unexpected risks for non-specialist investors.

In a recent report, GFIA analyzed how hedge funds specializing in emerging market investing can both exploit these market inefficiencies, and protect themselves from extremes of price movements, thereby generating stronger risk adjusted returns over time.  The paper further evaluates the performance of emerging markets hedge funds against traditional investment methods, including long only funds, using various metrics. The key conclusions of the study are: More…