Growth is an important signifier for lucrative investment opportunities, as capital invested in an economy can potentially create significant returns if that economy starts booming. Unfortunately, many "developed nations" experience low growth rates, stagnation, or even economic decline, as their markets are typically saturated. This is why some hedge funds specifically focus on investment opportunities in countries that start off with underdeveloped markets. After all, growth can only happen if there's enough space for it.
However, with this great potential for growth come many risks, as emerging markets are naturally more volatile than already developed ones. In some areas, there may also be a lack of institutional quality (i.e., unreliable governments, corrupt law enforcement agencies, a poorly educated workforce, etc.) or even a risk of political or social upheaval, all of which increases the risk associated with investing in emerging market hedge funds.
Some of the nations typically considered to be emerging economies also outlaw specific investment strategies and vehicles (short-selling, derivatives, etc.) or at the very least, don't allow outside actors to use them. This makes most typical hedging strategies much harder to pull off. For these reasons, EM investments have always been considered high-risk, high-reward strategies.
Prime examples for "emerging markets" include China, India, Mexico, Russia, as well as many African, South American, and Asian nations. That being said, the inclusion of China in this list should cause raised eyebrows, as this nation has one of the most powerful economies today. The truth is that there is no universally agreed-upon list of which nations have either emerging or developed markets. Various private companies, governments, and indices such as the well-known MSCI Emerging Markets Index have different views on the topic, though most definitions will be based on common factors such as GDP, levels of income, or the stability of the financial system.
The first thing for investors to understand about hedge funds that focus on global economies is this: while the hedge fund may work along the requirements of the US financial system and the hedge fund firm may be incorporated under US law, the assets in which they invest may work along very different national laws and regulations.
Thus, before you invest in an emerging markets hedge fund, you should make sure the hedge fund firm has a deep understanding of local laws and regulations. For example, it makes sense to look at the talent involved in investment decisions at the hedge fund firm you're interested in. Many hedge funds focus on particular emerging market countries, so having someone with a deep understanding of that specific country on the management team is an enormous advantage.
Quantitative Emerging Market Hedge Funds
As an investor in EM hedge funds, you might want to take a look at quantitative funds as an alternative investment option. These funds use advanced computer algorithms to value assets and predict market movements, which has given them a reputation for excelling in volatile markets.
Quants can react quickly to small-scale market movements and events, which helps them outperform many other investment vehicles in emerging economies which are typically very volatile. At the same time, the use of hedging strategies can mitigate some of the risks involved in these markets, which makes the quantitative approach very effective when dealing with emerging markets.
New investors, in particular, may be interested in strategies focused on emerging economies, as they usually offer significant returns for their investment. However, inexperienced investors will also want to rely on investments that use hedging strategies and quantitative analysis to limit the risks generally associated with investing in emerging markets.
With the CARL app, you gain access to a number of sophisticated quants with 15%+ targeted returns and no lock-up periods – which means that you can pull out quickly if a market crash or other event strikes the country you're investing in. CARL goes through a rigorous due-diligence process with all hedge funds that are available via the app to ensure that you can invest in whichever strategy that suits your needs. With a small initial investment of only $20,000 you can get the most out of emerging economies.