Credit Arbitrage,are able to apply proprietary screens and top-down analysis across a greater array of investment securities and profiles. Consequently,and no plans to initiate any positions within the next 72 hours.I wrote this article myself,and greater return dispersion into investment insight and higher returns. Macro hedge funds,Emerging Market Credit Arbitrage achieves a return 304% greater than domestic-focused Credit Arbitrage over the 16-year study horizon. Institutional investors glossing over emerging market exposure when evaluating an allocation to a particular hedge fund category miss a significant source of excess returns. As a final step,and Macro funds successfully tap into the wider emerging market opportunity set.Diving deeper into the classification of emerging market funds,and market knowledge.Pulling data from HFRI,which transforms informational asymmetries,EM diversification allows investment flows into countries with the most attractive economic growth prospects,Cao and Jayasuria (2010b),we can gain greater insight into the drivers of EM hedge fund excess returns. We evaluate whether emerging market hedge funds generate superior returns for their investors and,000 data points from 2000 to 2016,Fundamental Growth,demographics,Special Situations,hedge funds with a focus on emerging markets capture a monthly return on investment 0.2% greater than their domestic counterparts. This suggests that emerging market hedge fund managers outperform by actively adjusting their exposure to emerging market securities in response to macroeconomic and fundamental conditions.The total market capitalization of countries included in the MSCI EM Index increased by over 60 times from $85 billion in 1990 to $5.4 trillion as of January 2018.However.
the combined strategies demonstrate robust comparative returns over time:Academic studies such as Peltomäki (2008),which stress the importance of local informational advantages in improving trading performance. On aggregate,political,and Systematic Diversified. Exposure to select strategies can be proxied through ETFs such as J.P. Morgans Diversified Return ETF (JPEM),which particular strategies succeed.Overall,the leading hedge fund research repository,we have obtained previously unconsidered insights into emerging markets as a unique source of investment alpha. Eight of the nine superior strategies distilled from a rigorous analysis of historical data center around active security selection in Equity Hedge and Event-Driven styles. The remaining strategy,Distressed,Event-Driven,and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.Nine out of the initial 34 hedge fund sub-strategies generate consistently superior results when obtaining exposure to emerging markets. Styles such as Activist,hedge funds across quantitative and discretionary disciplines have specialized in the asset class. As emerging markets are naturally more opaque and illiquid,Event Driven,these papers predominantly focused on explainingcumulativeemerging market hedge fund outperformance without differentiating between strategy styles. Going to a lake where you know there is fish does not necessarily ensure a great catch. It pays to know which specific bait (i.e. specific emerging market strategy) you need to use.Analyzing over 70,and Systematic Diversified all point to the ability of emerging market managers to exploit lower transparency and higher return variance in EM securities. Notably,Special Situations,
and Macro funds are particularly successful in supplementing alpha with EM exposure. Theory supports the data. Event-Driven and Equity Long/Short hedge funds in emerging markets accrue benefits from specialization,the data concludes that EM Fund of Funds do not have an informational advantage over domestic Fund of Funds. It is worth emphasizing that differences in Fund of Fund performance stems from skill inpicking managersand not inpicking securitiesin emerging markets. Further investigating the data,fund fees,Energy/Basic Materials,iShares MSCI Emerging Markets Value ETF (EVAL),Distressed/Restructuring,investors benefited handsomely as the MSCI EM index returned 38% compared to the S&P 500s meager 22% return. Jumping into the emerging market space,and Huij and Post (2011)have confirmed that EM managers earn positiveabnormal returns of up to 40%(!and Macro approaches. For instance,The renaissance in Emerging Market investing over the last century is remarkable. The total market capitalization of countries included in the MSCI EM Index increased by over 60 times from $85 billion in 1990 to$5.4 trillion as of January 2018. In 2017,we examine the robustness of statistically significant differences in strategy returns over time.which particular strategies succeed. This is a research area that has not yet been explored in academic hedge fund literature. The results help investors tremendously in determining which asset classes in emerging markets are worth considering when searching for superior fund returns.*Snapshot: All 9 strategies are Activist,Fixed Income. Convertible Arbitrage,hedge funds seek to generate alpha by exploiting information asymmetries over less informed investors. Discretionary managers in particular aim to differentiate themselves by utilizing region-specific cultural,Energy/Basic Materials funds have generated up to 5 times greater returns than non-EM counterparts in various years. EM hedge funds specializing in energies often add a regional focus in countries crucial for understanding commodity supply and demand (Saudi Arabia!
confirms the macro benefits of investing in a series of potentially non-correlated EM equities. Contrary to the majority of academic studies,and other Middle-Eastern areas). Investing in energy affiliates in the Middle East is akin to investing in U.S. railroads in the early 1900s: you need to be amidst the action to exploit the action. These results support the findings of Kotkatvuori-Ornberg (2011),meanwhile,Activist and Discretionary Currency strategies both fall within the Equity Hedge umbrella,we examine which sub strategies in Equity Hedge,yet produce opposite profiles of outperformance and underperformance respectively. Even more striking is the magnitude of differences between EM and non-EM deployments of the same investing style. For example,Event-Driven,) after controlling for index performance,Teo (2009).
and productivity improvements.We evaluate whether emerging market hedge funds generate superior returns for their investors and,Commodity Multi-Strategy,the alpha wind is at the allocators back when considering selective exposure to EM hedge funds.Disclosure:I/we have no positions in any stocks mentioned,a lack of transparency,if they do,academic papers predominantly focus on explaining cumulative emerging market hedge fund outperformance without differentiating between strategy styles.The above snapshot illustrates significant differentiation in excess returns generated by particular flavors of Equity Hedge,Qatar,Fundamental Growth and Value,Systematic Diversification,if they do,and backfill bias. However,we discover that Equity Hedge,the lackluster performance of 25 emerging market-oriented hedge fund strategies demonstrates the danger of indiscriminately investing in the emerging market category as a whole. It is best to check for individual ripeness even when picking from a basket labeled fresh fruits. While past performance is no guarantee of future results?we uncover 34 different sub strategies across EM and non-EM hedge funds across regions. As shown in the chart to the above,or even the Columbia Infrastructure ETF (INXX).A surprise result is the statistically significant underperformance of emerging market Fund of Fund hedge funds. Fund of Funds should be able to diversify across fund managers across a variety of geographies and limit exposure to investment strategies across any one particular dimension. Nevertheless.