Markets Defy Conventional Theories

By Blakemore Foster - Brighton House AssociatesDuring the past month there have been numerous articles written in financial journals and newspapers regarding the intensified effect that the global economic downturn is having on emerging markets. Developed economies are struggling to combat rising unemployment and tightening credit, and that, in turn, has had an exponentially negative impact on emerging markets that rely on developed growth for support. However, this grim news has not deterred alternative investors. During the month of March, BHA interviewed 69 alternative investors that said they were targeting emerging markets-focused funds; 36 of those investors were explicitly searching for emerging markets-focused hedge fund managers. If developed markets have been battered over the past couple quarters, emerging markets have been crushed. However, in the hedge fund space the HFRX Emerging Markets Index is down only .5%. Alternative investors appear to be taking notice of this gritty performance, and there is a very high degree of risk and opportunity in this space. With valuations so low, investors are recognizing an opportunity to move into emerging markets in anticipation of the return of rapid growth that investors saw before the current crisis. The director of research at a U.K.-based consulting firm that manages over $1 billion in client assets is actively seeking global macro managers that are currently specializing in emerging markets. Because emerging market investments have inherent risk, global macro managers are uniquely positioned to move in and out of different strategies. Managers that can shift with volatile emerging economies have an opportunity to acquire drastically undervalued assets and enjoy the upside as developed markets recover. Emerging markets funds are difficult and risky as they tend to be more volatile then funds focusing on developed stable markets. However, with nearly 70 investors during the month of March alone indicating their renewed interest in emerging market funds, there is a clear mandate for these types of managers despite current headlines.