Hedge Funds See Best Prospects in Emerging Markets

Most hedge fund investors have a bearish outlook for 2008, but they still expect more than $200 billion to flow into the industry, according to Deutsche Bank’s sixth annual Alternative Investment Survey. Much of that money is likely to end up in emerging markets.

“Hedge fund investors’ prediction that the Middle East and North Africa will be the top performing region in 2008 indicates a clear redistribution of capital towards emerging markets,” according to Sean Capstick, London-based Co-Head of Deustche’s Hedge Fund Capital Group.

The survey also shows that the number of early stage investors has fallen by 25 percent in the past year, making 2008 a more challenging environment for startup funds.

“Hedge fund investors are cautiously poised, as shown by their increased focus on risk management and plans to allocate to strategies which are not sensitive to equity market risk,” said Maarten Nederlof, New York-based Co-Head of the Hedge Fund Capital Group.

Other highlights of the Alternative Investment Survey:

• 80% of investors are bearish; however, investors are more optimistic for next year: 40% expect the global economy to pick up in 2009.
• For the first year since the survey has been conducted, investors have added Risk Management as a major manager selection criteria, in addition to Investment Performance, Investment Philosophy and Manager’s Pedigree.
• Cash levels are high as investors take a “wait and see” approach to hedge fund investing. However, 53% of investors holding cash now plan to eliminate their cash holdings over the next 12 months, suggesting a renewed focus to make allocations to hedge funds.
• Hedge fund investors predict that Macro, Distressed, and Equity Volatility will be the top performing strategies for 2008.
• 70% of hedge fund investors do not currently use or apply leverage to their portfolios; 30% are actively leveraging their portfolios, including 6% through structured products.

Comments

[LJ]

We are now living in (or heading to) the winter time of the Kondratieff long wave cycle. If Kondratieff's economic model is as predictive as it used to be, this era tends to favor low-value-added assets. Low-value-added assets are predominately the products of the less-developed emerging economies. During this transition, the developed countries will continue to deplete the resources of the third world countries because of their greed. It will be interesting to see how long they can defy the gravity of fundamentals.