Reversing considerable losses in 2008, hedge funds investing in Emerging Markets experienced strong gains in 2009. The HFRI Emerging Markets (Total) Index gained +40.4 percent for the year, according to data released by Hedge Fund Research, Inc. Led by funds investing in Russia, Latin America and Emerging Asia, the rate of return doubled the overall industry gains as represented by the HFRI Fund Weighted Composite Index.

Assets invested in Emerging Markets hedge funds increased by $25 billion during 2009 to over $93 billion, as performance-based gains of $34.3 billion more than offset total investor withdrawals of $8.5 billion. Withdrawals were significant in the first half of the year, but moderated through mid-year and ended 2009 with a small net inflow of nearly $400 million in the fourth quarter.

Despite the strong gains of 2009, Emerging Markets hedge funds remain well below their previous performance peak (or high watermark) and still require a gain of +14.6 percent from year-end level to fully recover from the drawdown of -39.8 percent which began in 4Q07.

According to HFR, “continuing the trend of localization, the number of Emerging Markets funds located in China, Russia, India and Australia increased, while the number in the U.S. and U.K. continued to decline."

Who are the top brokers for Emerging Markets hedge funds? They include: Morgan Stanley and UBS, with both Credit Suisse and Citibank increasing market share. Similarly, top administrators are Citco and HSBC, with Northern Trust and International Fund Services increasing market share.

Here, according to HFR are region-specific performance and fund growth:

• Emerging Asia: The HFRX China Index gained +50.4 percent in 2009, and over 470 funds globally currently invest with a dedicated focus on Emerging Asia. Over half of all Emerging Market hedge fund capital is invested in Emerging Asia, and recent regulatory developments in Chinese financial markets are likely to be a catalyst for continued hedge fund industry growth in the region.

• Latin America: Led by strong performance in mining and commodity-sensitive funds, the HFRX Latin America Index returned +41.6 percent in 2009. Over 100 funds globally invest with a dedicated focus on Latin America, and account for $12.3 billion of investor capital.

• Russia/Eastern Europe: Historically the most volatile of the Emerging Markets regions, the HFRI Russia/Eastern Europe Index gained +51.4 percent in 2009. Over 160 funds invest with a dedicated focus on Russia/Eastern Europe, and more than 6 percent of all EM funds are now located in Russia.

• Middle East/North Africa: The HFRX MENA Index posted a gain of +28.3 percent for 2009, its best yearly total since the index was created in 2005. This performance took place despite tremendous local equity market volatility and sovereign credit concerns centered in the UAE in the fourth quarter. Over 20 funds maintain a dedicated focus on investing primarily in the MENA region, managing 2.5 percent of total Emerging Markets hedge fund capital.