تمرکز جغرافیایی در بازارهای نوظهور و عملکرد صندوق های تامینی

Emerging market hedge funds are an asset class which does not seem to outperform the market benchmarks. We hypothesize that the poor aggregate performance may be due to lack of focus of these funds. Our results suggest that a portfolio of emerging market hedge funds, which have geographical focuses, outperform their underlying stock markets. Hedge funds which focus on Eastern Europe appear to have the best outperformance. However, we also find that the performance of all emerging market hedge funds has reduced after the start of the 2008 Crisis.

Hedge fund investors can benefit from the skills of a hedge fund manager allowed by their free and flexible investment policies of hedge funds. When investing in emerging markets, which are both risky and challenging, investors can invest in hedge funds as well. But the study by Strömqvist (2007) presents evidence that emerging market hedge funds are not capable of outperforming their underlying benchmarks. This evidence is further supported by Peltomäki, 2008 and Abugri and Dutta, 2009. The objective of our study is to further analyze the performance of emerging market hedge funds with a consideration that the term “hedge fund” is most of all a legal definition. Consequently, within the industry some funds may be more alternative investments than other funds. The “true alternatives” can possibly produce superior performance than the others. To pick outperforming funds we propose an investment style for investing in emerging market hedge funds in each geographical location by investing in funds which have reported geographical focuses. Given the above reasoning, the purpose of our study is to focus on analyzing the aggregate performance of emerging market hedge funds with geographical focuses. The research problem of this study is two-folded: first, whether geographical portfolios of emerging market hedge funds outperform their underlying geographical focus markets. Second, whether the aggregate portfolio of focused emerging market hedge funds outperform the underlying indexes. We argue that the investment focus is the key in finding skilled managers within the industry beyond the term “hedge fund” with the following reasoning. As emerging market hedge funds carry a relatively high market risk, it is an opportunity for less skilled managers to infiltrate in the hedge fund industry to collect high fees. A solution to select the skilled managers would be to have a signal of their expertise in some emerging market. Indeed, Chen (2007) presents evidence for market timing ability of hedge funds in their focus market. The result leads us to expect that in their focus market emerging market hedge funds would also show better performance due to their profound expertise in the market. In fact, our approach of finding information advantage is closely associated with the local information advantage in Teo (2009) but the approach is different. Teo (2009) finds that especially for emerging market and event-driven funds local information advantage (i.e. fund operates close to its focus market) leads to better performance. We assume that market focus likewise to information advantage as does local information advantage. Our study also differs from Cao and Jayasuria (2010a), who examine the performance of individual emerging market hedge funds against their matched regional benchmarks (1 regional benchmark per fund) since they do not consider how the focus relates to the performance. In the following study, Cao and Jayasuria (2010b) study the performance of different geographical hedge fund portfolios and a global hedge fund index against their matched equity and bond benchmarks. In relation to these both studies, we consider all hedge funds that have geographical focuses as a group and we also adjust to the exposures of hedge funds to equity returns of multiple geographical focuses. To investigate the performance of emerging market hedge funds, we use the emerging market hedge fund database obtained from the EurekaHedge. Our analysis period starts in April 2000 and ends in September 2009. The data for performance analysis includes 786 funds. Our results suggest that a portfolio of emerging market hedge funds that have geographical focuses is able to show statistically significant and positive abnormal performance unlike the portfolio of other emerging market hedge funds. Therefore, a profitable investment style for emerging market investors is to allocate their funds toward emerging market hedge funds which have a distinct geographical focus. For data vendors, we propose that creating focused country benchmarks of emerging market hedge funds could be an interesting and well motivated benchmark style given the results by Teo (2009) and our study. The remainder if this paper is organized as follows: In Section 2 we review the literature on the market timing ability of hedge funds. Section 3 presents our hypotheses. In Section 4 we present the data used for this study followed by Section 5 for the methods used in this study. Section 6 presents our results and Section 7 concludes the study.

This study examines whether emerging market hedge funds outperform their underlying indexes in their respective focus markets. The results by Strömqvist, 2007, Peltomäki, 2008 and Abugri and Dutta, 2009 suggest that emerging market hedge funds at the index level do not outperform their underlying market indexes. In contrast to these earlier findings, the results of this study suggest that emerging market hedge funds on aggregate may be able to outperform their underlying indexes once they have a geographical focus. This geographical focus can be considered such that hedge funds clearly have an information advantage when they have a focus and so they are able to outperform their underlying benchmarks at the broad level. The result implies also that when non-direct investments in emerging markets is considered in the current global situation focused rather than global hedge funds should be used. For geographical portfolios, we find that Eastern Europe and Russia focus portfolio is the only portfolio able to show outperformance over the period March 2000 to August 2009. Our results suggest that the performance of emerging market hedge funds appeared to look much better before the crisis 2008. Moreover, the extend the emerging market hedge funds represent true alternative investments for investors is less after considering the crisis of 2008 in the analysis as our model is capable of explaining more than 90% of their returns. The specific characteristic of our model to other studies is the use of multiple emerging market regional indexes. The use of multiple indexes increases explanatory power of the model – especially in the case of focused hedge funds – and alters the results significantly as the alpha for focused funds becomes statistically significant. Information criteria also suggest that the analysis of model emerging market hedge funds is better without general emerging market returns. Thus, it is clearly evident that the analysts should use very geographical equity indexes when analyzing emerging market hedge funds. Overall, we find that focused hedge funds are becoming more attractive while idiosyncratic risk in emerging market hedge funds is decreasing. This result implies that easy anomalies and profit opportunities in emerging markets are decreasing and finding them requires more specialization. Without the profound expertise and knowledge of the underlying markets emerging market hedge funds would be conventional mutual funds rather than alternative investments and abnormal performance producers. It may be noted that the results may depend on the Database and the practice of reporting geographical focuses as our results using the Lipper TASS database provided much stronger evidence for outperformance of focused hedge funds. It is very likely that the difference in the results is altered by voluntary nature of reporting geographical focuses to the database. The results of this study may be applicable to mutual funds, particularly the performance shift from global funds to focused funds but this would be a considerable avenue for further research. Also, it would be interesting to find out whether geographical focus is important for other hedge funds than emerging market hedge funds. However, geographical focus in emerging markets may be more important as the markets are not as developed and transparent as in the developed economies. In further studies, it would be also interesting to test hedge fund performance against some country allocation strategies. As Naranjo and Porter (2007) confirm profitability of momentum strategies on emerging market country portfolios, one could use such a strategy as a hedge fund performance benchmark.