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Capital Markets

Hedge funds: Emerging markets funds set for crucial role

Managers seek better returns in increasingly influential asset class

Hedge fund managers expect emerging-market hedge funds to be become increasingly important. According to a survey by KPMG, almost 40% of hedge fund managers expect emerging-market hedge funds to be used most over the next three years. Just 17% considered the sector to have been crucial over the past three years.

"Events this year have reminded investors to question the extent to which a sector has become crowded. If you're looking for new hedge fund strategies, you have a better chance of good returns in a sector that is uncrowded. This remains the case in the emerging-markets space," says Hugh Willis, who is CEO of Bluebay Asset Management, which runs a $650 million emerging-market hedge fund.

Ignorance and emotion

An increase in awareness of emerging-market countries will also add to interest in the sector say managers. "Plenty of people have had reservations about the sector in the past. Most, however, have made the decision not to invest based largely on ignorance, emotion and newspaper headlines. This has generally been an expensive mistake," says Willis. But investors have become more at ease with the asset class.

"Both the Argentina default of 2001 and the Brazilian election of 2002 showed investors that damage could be limited to those countries only, so I think people are feeling more comfortable about investing in emerging markets around the world," says Ignacio Sosa, who runs a $250 million emerging-market hedge fund.

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