Phenomenal returns from emerging markets in the last couple of years have ignited interest from institutional investors. With the slowing down of the US and European markets, and relative decoupling of emerging markets from developed economies, allocation to emerging market funds are continuing to rise. Deutsche Bank's annual Alternative Investment Survey early this year also confirmed increased allocation to emerging market funds, particularly to the Middle East and North Africa regions. The emerging market hedge funds (HFs) however face various challenges while investing in these markets due to evolving regulatory environment and relatively immature nature of these markets. Two of the major challenges that these HFs face while investing in emerging markets are limited options in terms of strategies (e.g., limited shorting options) and limited quality research options.

In this backdrop, this research paper aims at finding answers to the following two questions:

Given the limited options in terms of strategies in emerging markets, which HF strategies have worked successfully in the last few years and which strategies are expected to provide superior returns in the near to medium term?

The scope include analysis of various HF strategies rather than emerging market funds themselves; HF strategies might include equity long / short, market neutral, fixed income arbitrage, convertible arbitrage, distressed securities, special situations, etc.

Additionally, considering that there are a few quality research options for HFs investing in emerging markets, how are these emerging market funds spending their research budgets and sourcing the requisite research for making an investment decision?

Additionally, considering that there are a few quality research options for HFs investing in emerging markets, how are these emerging market funds spending their research budgets and sourcing the requisite research for making an investment decision?

2. Top Five Factors that Institutional Investors Look into While Investing in Emerging Market Funds

Emerging markets such as the Middle East, Africa, Latin America, Eastern Europe and Asia-Pacific, hold great potential, but are also fraught with significant risks. Emerging market funds have experienced significant growth during the last few years, leading to an increase in both the number and complexity of related investment strategies. While many HF investors such Pension Funds, Fund of Hedge Funds (FOHFs) and Sovereign Funds, have been increasing their allocation to these emerging market funds, they exercise a great deal of caution while making an investment decision. HFs seek to profit by following many speculative investment practices such as aggressive leveraging, which may provide impressive returns to investors at times, but may also heighten the risk of investment loss. This is particularly true in emerging and frontier markets, where the regulatory environment is still evolving and inherent risks are often more severe.

In this backdrop, this research paper aims at finding answers to the following questions:

Given that investing in emerging and frontier market funds is a risky proposition, how do institutional investors and FOHFs conduct due-diligence on emerging market funds to ensure sound investment decision?

What are the top five factors that institutional investors look into while investing in emerging market funds and how do they analyze HFs against those parameters?