EM, commodity hedge funds fall out of favour

Emerging-market hedge funds have fallen out of favour, with long/short equity cementing its dominance among investors, particularly in Asia, according to a new Credit Suisse survey.

This compares to a investor poll conducted by the bank at the end of 2012, which put EM equity as the second most sought-after strategy, after long/short and ahead of event-driven.               

The three most favoured strategies are now long/short equity fundamental, event-driven and macro, indicates the ‘Mid-Year Survey of Hedge Fund Investor Sentiment’ from Credit Suisse Capital Services.

Among Asian investors, the top three are long/short equity (trading-orientated long/short), fundamental (the latter relies more on stock research while the former involves more active trading), and global macro.

The shift is in line with performance losses among EM strategies this year, including China-focused funds.  

The Eurekahedge Emerging Markets Hedge Fund Index was down -3.42% in June, with gains of just 0.19% in the first half of 2013. Similarly, the data provider’s Greater China index fell -4.86% in June, although H1 returns have been better, at 5.17%.

While the survey did not specify the reasons for the shift in sentiment, rebounding stock markets in late 2012 and early this year were likely factors. However, a sharp correction last month – which was particularly severe in China – led to a drop in manager performance last month.

Investor allocations are expected to be active for the remainder of the year, with 88% of respondents planning to make allocations.

While long/short equity funds are in line to be the biggest beneficiaries of inflows, commodity vehicles are expected to see the largest redemptions, with 32% of investors planning to reduce those allocations. EM credit funds are forecast to take a similar hit, with 29% saying they will lower exposure to the strategy.

There are regional differences in strategy preference, with Asian institutions are expected to make net allocations to commodity trading advisor (CTA) funds. This contrasts with the net redemptions predicted from CTAs by investors in the Americas and Europe, the Middle East and Africa.

Distressed credit hedge funds were favoured by 30% of Asian investors, but only by 1% of those in the Americas. A similar polarisation was seen for liquid credit, which was favoured by 13% of investors in the Americas, while Asian institutions are expected to make net redemptions from the strategy.