Emerging Markets Hedge Funds Soar in Late 2023, Driven by Inflation Drop and Crypto Gains

Emerging Markets (EM) hedge funds delivered a strong performance in late 2023, benefiting from declining inflation, interest rates, and a weaker US dollar. Despite facing macroeconomic and geopolitical challenges over the past 18 months, these funds have managed to navigate turbulent conditions, yielding impressive returns by year-end.

The HFRI EM: Latin America Index rose by 8.0% in November, pushing its year-to-date (YTD) return to 18.3%. Similarly, the HFRI EM: India Index saw a 7.0% surge in November, bringing its YTD return to 27.3%. Funds with significant exposure to cryptocurrency, particularly in regions like Korea, Russia, China, and the Middle East, also performed well, as the HFR Cryptocurrency Index climbed 9.9% in November, boosting its YTD return to 49%, following a sharp drop of 54% in 2022.

The broader HFRI Emerging Markets (Total) Index gained 4.0% in November, increasing its YTD return to 6.0%. The HFRI Fund Weighted Composite Index®, which includes both Emerging and Developed markets, reported a 4.9% YTD gain, led by the HFRI Equity Hedge (Total) Index with a 6.7% increase.

Notably, hedge funds investing in Eastern Europe and Russia showed resilience despite the ongoing conflict in Ukraine, with the HFRI EM: Russia/Eastern Europe Index surging 24% from June to November. After a decline of 15.6% in the first five months of the year, the index now stands at a positive 4.8% YTD.

As of the start of the fourth quarter of 2023, total assets in Emerging Markets hedge funds were stable at approximately $245.8 billion, while capital invested in Asian hedge funds remained steady at $126.6 billion. Regional performance varied, with the HFRI EM: MENA Index up by 3.9% and the HFRI EM: China Index down by 3.9%. Meanwhile, the HFRI Japan Index posted a solid YTD gain of 8.2%, benefiting from the sharp depreciation of the Japanese Yen against the US Dollar.