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Emerging markets in the hedge fund focus

The founder of a Moscow based hedge fund, Richard Deitz says, managers investing in emerging markets will see massive inflows as the industry comes back on track after three difficult years.

RD: “Emerging market countries, which are very strong – emerging market countries have record levels of reserves, I think, something like 60 or 65% of all global reserves are now held by, currency reserves, are held by emerging market countries. And when you look at the other side of equation, in developed markets, if they can be simply called that, they look like what we used to think emerging markets look like. They have extremely high levels of debt, they have in particular in Europe, in the periphery of Europe, they have situations where, that look worse. I mean, if you look at historically what countries went through crises, in emerging markets, well they never had macro positions – they were never allowed to get to positions where it was as bad as you would see, in Spain, Greece or Portugal. So you have fiscal tightening in the core countries, which is inevitable because of the very high levels of debt.You don’t have that problem in emerging markets.And then you have growth – partly because of the fiscal situation and partly because of more secular phenomenon – that’s much higher in emerging markets than in developed markets. So, I don’t think, it’s very surprising that we would see that emerging markets will outperform developed markets.”

RT: Despite this great performance of the emerging markets funds, the survey suggests that investors are cautious about allocating new money to emerging markets. The figure for 3Q was just about $10 million. What, do you think, drives investors away?

RD: “You know I think you have to remember that a hedge fund investor base itself, is still very damaged. There’s a good portion of it, I would say, which has gone and maybe never going to return, and probably shouldn’t have been there in the first place, and then kind of some of the larger institutions in the other parts that, I think, are probably going forward, going to be the more significant and better and more stable part of the hedge fund investor base, still taking their time, I think, to move forward. When investors come back, it’s kind of natural that they may come back to core markets first before they go to emerging markets. But I wouldn’t think, that there is anything particularly scary.I think the opposite – that there is tremendous enthusiasm about emerging markets. And, I think, you’ll see a disproportionate amount of those flows going into emerging markets as we go forward.”