Will hedge fund flows to emerging markets slow down?
Net hedge fund flows to emerging markets have slowed in the December quarter, after rising steadily for years
Net hedge fund flows to emerging markets (EMs) have slowed in the December quarter, after rising steadily for years. Net asset flows slowed to $183.8 billion in the last quarter of 2014 from an all-time high of $185.15 billion in the quarter ended September, according to data compiled by HFR Emerging Markets Hedge Fund Industry Report. Does this indicate a slowdown in funds flow to Indian markets? Not really, because the fall was primarily on concerns about Russia and Brazil.
The big question is: with the dollar strengthening, will hedge fund flows slow further to emerging markets? Ken Heinz, president of HFR said, “Not necessarily, but it is possible that net asset flows to emerging markets slow in the March quarter as well. Managers (both EM and non-EM) had been reasonably well-positioned by the US dollar gains, but I think stabilization in Russia will outweigh concerns on additional US dollar strengthening." Also, as interest rate increases are widely anticipated, Heinz does not anticipate this as a systemic shock to hedge fund managers. He added that the outlook of hedge funds towards India is very positive at present.
The estimated hedge fund allocation to India is about 3.3% from Asia-focused hedge funds, according to HFR.
Hedge funds are short-term funds and generally they position themselves around important events such as the budget, central bank meeting, and policy announcements, and also take a bet on the currency.
With the budget and two rate cuts behind us, the only important triggers are the passage of the land acquisition bill and the goods and services tax (GST) bill. “There could be a lull in the hedge fund flows to India at least for now and we believe they would wait for the land acquisition bill to pass to take a big position on India and allocate some funds" according to U.R. Bhat, managing director at Dalton Capital Advisors (India) Pvt. Ltd. It is important to note that even in a downtrend, hedge funds can take short positions and bet on events.
The bigger concern is whether US-based endowment and pension funds will scale back allocation to emerging markets, including India. Saurabh Mukherjea, head of institutional equities at Ambit Capital Pvt. Ltd, said American asset allocators giving money to pension funds and endowment funds have seen good returns from emerging market assets in the past two years and may be bringing that money back home to US tracker funds and government bonds as risk appetite reduces. However, this may not be so bad for India, because European asset allocators are allocating money to emerging market equities.
As CLSA in their India strategy note dated 24 March cautioned, “While there is a general agreement on the attractiveness of India’s structural long-term story, several investors appeared to be seriously re-evaluating their positioning and incremental inflows seem unlikely in the near term."
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