GFIA has been researching Asian and emerging market hedged and absolute return funds since 1998. Based in Singapore, GFIA’s sole activity is the research of skill-based managers (those seeking alpha from public markets), and it sells this research through advisory contracts and discretionary money management of its Wittenham funds of funds and managed accounts. The firm is fully independent.
Emerging market equity investing has typically been characterised 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 this article, GFIA analyses and discusses how hedge funds specialising 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 article further evaluates the performance of emerging markets hedge funds against the traditional investment methods, including long-only funds, using various metrics. The key conclusions of the study are:
1. on a risk-adjusted basis (whether risk is measured as volatility or drawdown), emerging market hedge fund aggregates have performed better than both the broader emerging market equity indices, and developed market indices;
2. emerging market hedge funds have relatively low correlation with developed market asset classes for most time periods in the last eight years;
3. adding emerging market hedge funds to traditional portfolios creates powerful diversification benefits which can expand portfolios’ efficient frontiers;
4. during periods of falling markets, hedge funds exhibit lower drawdowns than their underlying markets. This, in turn, enables them to recover more swiftly when markets return to an upward trend, providing more powerful compounding than unhedged investing; and
5. finally, a terminal wealth study of hedge fund returns versus mutual fund returns demonstrates that, over holding periods of both five years and three years, terminal wealth from portfolios of hedge funds is superior to that from mutual funds, regardless of the starting year of investment.