Hedge funds investing in Russia experiencing a surge

Rick Steves

The HFRI EM: Russia/Eastern Europe Index recorded an impressive +24 percent increase from June through November, rebounding from a decline of -15.6 percent in the initial months of the year. As of November, the index is estimated to be up +4.8 percent YTD, following a substantial performance dip of -40.3 percent in 2022.

In late 2023, Emerging Markets (EM) hedge funds experienced significant growth amid decreasing inflation, interest rates, and a weakening US Dollar, according to an HFR report.

The HFRI EM: Latin America Index saw a notable surge of +8.0 percent in November, contributing to a year-to-date (YTD) return of +18.3 percent.

Similarly, the HFRI EM: India Index rose +7.0 percent in November, reaching a YTD gain of +27.3 percent. Cryptocurrency-focused hedge funds across EM regions, including Korea, Russia, China, the Middle East, and Japan, exhibited robust performance, with the HFR Cryptocurrency Index soaring +9.9 percent in November and a remarkable YTD return of +49 percent.

HFRI EM: Russia/Eastern Europe Index on the rise

The HFRI Emerging Markets (Total) Index, encompassing all EM regions, advanced +4.0 percent in November, resulting in a YTD return of +6.0 percent. The HFRI Fund Weighted Composite Index, comprising funds investing in both Emerging and Developed markets, achieved a YTD gain of +4.9 percent through November. Notably, the HFRI Equity Hedge (Total) Index led the composite index with a substantial +6.7 percent increase in the first eleven months of the year.

Despite the ongoing military conflict following the Russian invasion of Ukraine, hedge funds investing in Eastern Europe and Russia demonstrated resilience, experiencing a surge in recent months. The HFRI EM: Russia/Eastern Europe Index recorded an impressive +24 percent increase from June through November, rebounding from a decline of -15.6 percent in the initial months of the year. As of November, the index is estimated to be up +4.8 percent YTD, following a substantial performance dip of -40.3 percent in 2022.

Total Emerging Markets and Asian hedge fund assets remained stable at the beginning of 4Q23, with estimated AUM for Emerging Markets at $245.8 billion and total capital invested in Asian hedge funds at $126.6 billion.

In addition to Latin America and India, other Regional Emerging Markets indices displayed mixed performance. The HFRI EM: MENA Index gained +3.9 percent YTD through November, while the HFRI EM: China Index declined -3.9 percent YTD, following a fall of -19.3 percent in 2022. The HFRI Japan Index, benefiting from a sharp decline in the Japanese Yen against the US Dollar, posted a robust gain of +8.2 percent YTD through November.

Latin America and India in focus

Kenneth J. Heinz, President of HFR, noted the sharp reversal of trends in mid-4Q, signaling a shift from volatile risk-off to a powerful risk-on sentiment driven by unexpected declines in inflation and interest rates. “Emerging markets hedge funds, especially funds focused on Latin America and India have surged since mid-4Q, a sharp reversal of the volatile risk-off trends which dominated the majority of the year, to a powerful risk-on sentiment driven by surprise declines in inflation and interest rates,” stated Heinz.

“Despite recent declines in macroeconomic risks, geopolitical risks remain historically elevated, including potential for dislocations or disruptions in energy, commodity, and supply chain markets. Leading global institutions and investors seeking opportunistic access to these trends are likely to increase allocations to specialized EM and Cryptocurrency hedge funds into 2024 which have demonstrated their strategy’s success and robustness through recent and ongoing volatility.”

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