It may be too early to say that hedge funds are back.  However, hedge funds investing in Emerging Markets posted strong gains to end the first quarter and have extended those gains into the second quarter, according to the Hedge Fund Research, Inc. (HFR).

Following a gain of over 1 percent in the volatile Q109, the HFRI Emerging Markets (Total) Index advanced over 7.5 percent in April, the best performance month since December of 2000. Strong performance in March and April offset losses in the first two months of the year, with the HFRI Emerging Markets (Total) Index gaining nearly 9 percent year to date.

Moreover, recovery of Emerging Markets hedge funds could be a great indicator of things to come. According  Kenneth Heinz, president of Hedge Fund Research, Inc. "Hedge funds investing in Emerging Markets have produced strong, albeit volatile, long-term performance, posting an annualized gain of more than 12.5 percent since 1990, nearly double that of the S&P 500."

For the quarter, asset gains due to performance added $5.1 billion to Emerging Markets hedge funds assets under management (AUM). This number almost offset investor withdrawals of $6.4 billion. In aggregate, AUM in Emerging Markets hedge funds declined by $1.2 billion to $66.2 billion; this followed a drop of nearly $23 billion in Q4 2008.

Gains Follow Terrible Year in 2008

The strong performance by Emerging Markets hedge funds YTD 2009 follows a decline of -37.2 percent in 2008, the worst calendar year performance for Emerging Markets since 1990.

It's true that Emerging Market hedge funds are volatile. However, a positive sign is Emerging Markets hedge funds have historically posted strong gains following market bottoms; in the twelve months following the trough of each of the five largest performance declines, these funds have produced an average gain of 23.3 percent.

"Investors exhibited extreme risk aversion at the end of 2008, withdrawing record amounts of capital. While redemptions continued in the first quarter at a slightly lower level, risk aversion began to recede into the end of the quarter and has continued to fall," said Kenneth Heinz, president of Hedge Fund Research, Inc.

Other data on specific Emerging Markets from HFR:

Russia/Eastern Europe: Of all funds focused on Emerging Markets, those investing in Russia/Eastern Europe have posted the strongest performance over the last ten years, gaining 19.3 percent annualized, but with tremendous volatility. Over twenty percent of all Emerging Market hedge fund capital is currently focused on Russia/Eastern Europe, up sharply from 14 percent in 2002.

Latin America: Brazil is second only to China with regard to the number of funds located in any Emerging Markets region, with more than 7.5 percent headquartered in Brazil. The 100 funds currently investing in Latin America are the smallest in terms of average size of approximately $40 million, but these posted a gain of nearly 2 percent in Q1 09 and over 9.6 percent in April alone.

Emerging Asia: There are currently more than 460 funds focused on Emerging Asia, encompassing 46 percent of all Emerging Markets funds; nearly 13.5 percent of Emerging Markets funds are located in China. Despite tremendous volatility of the underlying equity markets, hedge funds investing in Emerging Asia have produced cumulative gains over the last three years and have posted the smallest losses of all Emerging Markets regions over the last 12 months.