Emerging Markets and China Hedge Funds Likely to Outperform

Investors piling into hedge funds for the second half of the year may want to turn to Chinese and other emerging markets. The asset class in both sectors surged during the second quarter, and the funds are likely to outperform other hedge fund strategies going forward, according to Hedge Fund Research.

Hedge fund capital in emerging markets jumped to $244.4 billion in the second quarter, increasing $13 billion from the first three months of the year, an HFR report said Thursday.

The HFRI Emerging Markets (Total) Index also gained 12.8% in the second quarter, the best quarterly performance in nearly two decades since 2001, HFR said. Year to date, the index is essentially flat. Russia and Eastern Europe led the index with a 15% surge, while Latin America increased 14%.

China-oriented hedge funds have also performed well. The HFRI China Index returned 14.5% in the second quarter, the best quarterly performance since the first quarter in 2019. Year to date, the index is up 13.1% through July.

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Both indexes’ performance also edged past that of the global hedge fund benchmark, the HFRI Fund Weighted Composite Index, which jumped 12.3% in the four months from April to July. The HFRI 500 Fund Weighted Composite Index gained 10.8% over the same time period.

Neither index outperformed the US stock market, which jumped 20% during the second quarter. But hedge funds are enjoying a surge in popularity thanks to investors concerned about continued market volatility in the second half of the year. Ongoing trade tensions and the upcoming US elections are weighing on investors.

Prior to the pandemic, hedge funds had been on the decline for years, thanks to high fees and low returns during the record market rally that crashed so abruptly in March. More than 4,000 hedge funds closed their doors in the past five years alone.

Hedge fund capital invested in emerging markets and China recovered from steep losses in the first quarter’s market drawdown. Gains across regional equity helped emerging market hedge funds offset the first quarter’s losses, as did broad currency gains against the declining US dollar.

Those ingredients, as well as continued volatility in the second half of the year, are positioning hedge funds that have demonstrated performance generation in recent months to “likely” lead industry performance and attract institutional investors, according to HFR President Kenneth J. Hein. Hedge funds do best when they have volatility to navigate.

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Tags: business, China, Coronavirus, COVID-19, Emerging Markets, Funding, hedge, Hedge Fund, Investment, Investment Fund, Management

The White House’s Office of Information and Regulatory Affairs has taken the so-called endowment tax under review, according to the regulatory review office’s website.

The endowment tax is a 1.4% excise levy on the net investment income of high-endowment private colleges and universities that was included in the Tax Cuts and Jobs Act of 2017.

The tax applies to private college or universities that have at least 500 full-time tuition-paying students—more than half of whom are located in the United States—and that have assets other than those used in its charitable activities worth at least $500,000 per student. According to the IRS, an estimated 40 or fewer institutions are affected by the endowment tax.

The excise tax is, not surprisingly, universally unpopular among the nation’s universities and colleges, particularly the ones with the larger endowments that will be affected the most by it.

“The administration proposed regulations on this tax in July 2019 and we understand that it is now the final regulations that are under final review,” a spokesperson for the National Association of College and University Business Officers (NACUBO) told CIO. “NACUBO commented on the proposed regulations in 2019 and is eager to see the final rules.”

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In its comments to the proposal, the NACUBO said it is “strongly opposed to this tax,” and called it “an unprecedented and damaging attack on the tax-exempt status of higher education institutions and their students.” NACUBO said the tax will diminish charitable resources available for financial aid, research, academic support, public service, and innovation.

“As public charities and educational entities, colleges and universities dedicate their efforts and resources to the public good through education and scholarship,” NACUBO said. “The NII [net investment income] creates a new tax liability for private institutions that, by definition, will reduce resources available to improve access and invest in scholarship.”

Stanford University, which had an endowment tax bill that was estimated to be $42.9 million, said the endowment tax will hurt the university’s financial aid.

“Over time, the tax will reduce funds available from the endowment to support financial aid and other essential support for our core academic mission,” Stanford University spokesperson Dee Mostofi wrote in a statement to The Stanford Daily in February. “Stanford strongly opposes the tax and is actively working on efforts to repeal or limit the tax.”

And Harvard University and its $40.9 billion endowment had estimated that it would have to pay nearly $50 million to satisfy the excise tax for fiscal year 2019.

“Less money is now available for the university to maintain financial aid, which totaled $193 million for undergraduates this year,” wrote Thomas Hollister and Paul Finnegan, Harvard’s vice president for finance and treasurer, respectively, in Harvard’s annual financial report.

According to think tank the Tax Policy Center, the endowment tax is only expected to generate about $200 million a year, which it said is not a significant amount of revenue for the federal government, but could set a precedent for imposing further taxes on university endowments.