Hedge fund investors have a change of heart

July 28, 2013

By: Ashley Kindergan From The Financialist

A lot has changed since March. Just four months ago, when Credit Suisse asked hedge fund investors if and how they planned to allocate money to a variety of strategies in the coming year, they were more enthusiastic about emerging market equity strategies than any other tactic but long/short equity. But there’s an obvious explanation for the abrupt change in sentiment. Several consecutive years of low interest rates around the globe had investors starved for yield, and many of them went looking for it in emerging markets. Fast forward four months – which is also two months after Federal Reserve Chairman Ben Bernanke first revealed that the American central bank would likely start winding down sometime this year the monthly asset purchases that have been keeping a cap on interest rates– and that hunger for fast growth no longer has such an exotic taste to it.

In a follow-up survey that Credit Suisse released this week, hedge fund investors ranked emerging markets equities as their ninth favorite strategy, while emerging markets fixed income came in 12th place – down from sixth in March. (The rankings are of “current net demand” — the percentage of investors who plan to increase their allocations to a particular strategy minus the percentage who plan to decrease them.)

Twenty-one percent of global investors said they would be increasing allocations to emerging markets equity strategies, while only 11 percent said the same for emerging markets fixed income strategies. Net demand for emerging market equities dropped from 34 percent of investors to 0 in just four months, while net demand for credit fell from 7 percent to -18 percent. The pain in emerging markets bonds seems like it’s not over yet. (In the charts below, + signifies increasing allocation, 0 signifies stable, and – indicates decreasing allocation.)

The rush out of emerging markets is already well documented. Credit Suisse reported earlier this month that foreign investors dumped fixed income holdings in non-Japan Asia at record speed in June and also hightailed out of Asian emerging markets equities after Bernanke’s May comments.

As always, investors’ allocations varied widely depending on their domicile. For example, even with an overall dampening of interest, Americas-based investors were nevertheless much more positive about emerging markets fixed income strategies than those in the Asia-Pacific region. Seventeen percent of Americas-based investors said they would increase allocations, but not a single Asia-based investor said the same.

The only strategy that global hedge fund investors were less enthusiastic about than emerging markets fixed income was commodities, with 32 percent saying they planned to pull back and just 10 percent saying they planned to commit more money to the tactic – a result no doubt influenced by resource-hungry China’s unfolding economic slowdown.

One thing remained consistent from March to July: Long/short equity remained investors’ top strategy, with a full 61 percent saying they planned to increase allocations. “Investors are…reacting to improving global markets and lower correlations by seeking those funds that can differentiate by their stock-picking abilities,” said Robert Leonard, Managing Director and Global Head of Capital Services at Credit Suisse.