Академический Документы
Профессиональный Документы
Культура Документы
Exhibit 1
Composition of MSCI EM Index (19882013)
1988 (%)
1993 (%)
1998 (%)
2.4
5.8
4.6
Brazil
25.5
11.0
11.9
10.7
Chile
7.8
5.5
4.5
1.6
China
0.7
19.8
Colombia
0.8
1.0
Czech Republic
1.1
0.2
Argentina
2013 (%)
Egypt
0.2
Greece
3.8
1.4
7.3
0.5
Hungary
1.6
0.3
India
7.9
6.3
Indonesia
5.6
1.8
2.2
Israel
3.3
Jordan
1.7
0.2
0.2
Korea
10.7
16.1
3.5
Malaysia
29.5
26.0
3.9
Mexico
10.0
20.7
11.3
5.4
Morocco
Pakistan
0.4
Peru
1.0
0.4
Philippines
3.0
2.9
2.1
0.9
Poland
1.4
1.7
Portugal
6.5
1.3
Russia
1.3
6.1
South Africa
10.3
7.4
Sri Lanka
0.1
Taiwan
9.9
11.7
Thailand
9.9
13.3
2.8
2.1
Turkey
2.8
2.0
1.5
Venezuela
1.0
As of December 2013
Source: MSCI
Exhibit 2
EM Sovereign Credit Ratings Reflect Economic Consistency
BRIC
Aa2
Other EM
Aa2
A3
A3
Ba1
Ba1
B2
B2
Caa3
Caa3
China
1990
1994
India
1998
Brazil
2002
Mexico
Thailand
Russia
2006
2010
2014
1990
1994
Philippines
Argentina
1998
South Africa
2002
2006
2010
2014
As of 31 March 2014
Reflects each countrys Moodys foreign currency long-term rating at month-end.
Source: Countryeconomy.com
Exhibit 3
Growth of EM Bond MarketsMarket Capitalization
(US$ Billions)
1200
J.P. Morgan EMBI Global
J.P. Morgan GBI-EM Global Div
900
600
300
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
2014
As of 30 April 2014
Source: J.P. Morgan
Part of this dynamic was due to economic growth, but another part
resulted from the participation of global investors in EM capital
markets development. As demand for access by DM investors grew,
companies and their developed world investment banks responded
by creating depositary receipts (in the US, typically referred to as
American Depositary Receipts or ADRs)7 for investors to purchase.
The number of EM companies that were listed to trade on DM
exchanges and the volumes of these issues traded experienced tremendous growth. Since the 1990s the number of EM companies issuing
depositary receipts grew from approximately 1,500 to almost 4,000
Exhibit 4
Depositary Receipts Total Trading Volumes
(US$ Billions)
120
Latin America
Africa
100
Eastern Europe
Asia Emerging
Asia Developed
80
Exhibit 6
EMs versus DMsChange in EM Equities Average Daily
Trading Volume
60
40
(%)
600
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1991
1992
20
As of 30 April 2014
Source: Citibank
Developed Markets
Emerging Markets
450
300
150
Exhibit 5
Asset Growth of EM Equity and Debt Mutual Funds
0
Developed Europe
Markets
(US$ Billions)
1,800
EM Equity
US
Other
Emerging Asia
Markets
EMEA LatAM
EM Debt
1,200
Exhibit 7
Growth of Frontier MarketsMarket Capitalization and ETF
Assets
600
0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
(US$ Billions)
200
(US$ Millions)
600
150
(US$ Billions)
400
200
100
150
200
50
100
50
0
2006
0
2007
2007
2008
2009
2010
2011
2012
2013
2014
As of 30 April 2014 for mutual fund data and 28 February 2014 for ETF data
EM Equity and EM Debt above represent Morningstars US OE Diversified Emerging
Markets and US OE Emerging Markets Bond categories, respectively.
Source: Morningstar, Investment Company Institute, Haver Analytics
0
2008
2009
2010
2011
2012
2013
As of 30 April 2013
The iShares MSCI Frontier 100 ETF was launched on 12 September 2012. The MSCI Frontier
Markets Index was launched on 18 December 2007.
The indices listed above are unmanaged and have no fees. It is not possible to invest directly in
an index. This is not intended to represent any product or strategy managed by Lazard.
Source: MSCI, BlackRock
Exhibit 8
Evolution of World GDP Composition
Share of World GDP (%)
100
75
50
25
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013E
2014E
2015E
2016E
2017E
2018E
Advanced Economies
As of 30 April 2014
Data are based on the IMFs country classification of advanced economies and emerging and developing economies. Estimated or forecasted data are not a promise or
guarantee of future results and are subject to change.
Source: IMF
Exhibit 9
Historical P/E and ROE for World, EM, and Frontier Markets
20
P/E
30
10
2008
2009
2010
2011
2012
2013
2014
2009
2010
2011
2012
2013
2014
ROE (%)
20
15
10
2008
EM
World
FM
As of 30 April 2014
Past performance is not a reliable indicator of future results. Data are based on the
MSCI EM, MSCI Frontier Markets, and MSCI World indices.
Source: MSCI
For example, event-driven managers can typically select any instrument in the capital structure of a company to express their view,
whether it is stocks, bonds, bank debt, or hybrid securities like preferred equity or convertible bonds. This view is typically a call on the
outcome of a particular event that a company is undergoing, such as
a restructuring or a takeover. This flexibility is not typically found in
traditional fixed income and equity investment products.
Global macro managers can have long or short positions across a vast
number of different securities, from currency forwards to equity or
bond futures, or from interest rate or credit default swaps to cash
instruments. Even a large-cap, US long/short equity manager has
the flexibility to adjust gross exposures significantly, increasing or
decreasing economic and/or market risk to suit his or her view.11
The less developed nature of emerging and frontier markets means
that the linkages between equity markets, currency markets, and credit
markets are potentially more impactful than in the developed world.
The emerging opportunity set is also spread across regions with distinct economic, political, and market environments (i.e., Asia, Latin
America, Africa, Eastern Europe, and the Middle East).
Alpha Generation
Generally speaking, the source of alpha for all hedge funds is the skill
of the managers deploying their strategy. However, also important in
their ability to leverage their skill sets is the unconstrained nature of
their investment approach.
Stock Picking
Historically, EM hedge funds have been an excellent source of
stock picking alpha, and we expect that this trend is likely to
continue. While EM hedge fund managers are intelligent, dynamic,
Exhibit 10
EMs Offer Wider Return Dispersion
Return (%)
Developed Markets
Emerging Markets
300
Annualized Return
Range
200
100
7.94
11.02
MSCI World
Index
Australia
-100
0.79
Japan
8.47
10.63
United
Kingdom
United
States
12.12
17.07
10.59
19.99
8.24
MSCI EM
Index
Brazil
Indonesia
Mexico
Philippines
and successful market participants, this does not particularly distinguish them from DM hedge fund managers. We suspect that EM
hedge fund managers also enjoy a differentiated opportunity set compared to their DM peers.
To test this theory, we look at the compound annual return in the
context of the range of annual performance of the MSCI EM Index
and several of its individual constituents compared to the MSCI
World Index and several of its constituents over the period from
1998 to 2013. Exhibit 10 clearly shows an increased dispersion in
returns available to EM investors. For example, while Australia and
Indonesia had very similar compound annual returns over the period,
Indonesias worst year was -74% versus -49% for Australia, with bestyear numbers being +258% versus +77%.
Shorting
In all hedge fund strategies, shorting adds to alpha in two ways:
1) offsetting some of the market risk of the long portfolio and
2) generating gains from security-specific risk in the short portfolio.
In the latter case, these can either be outright profits or relative gains
when short positions go down more (or up less) than either the market
or the long portfolio or both.
In general, shorting is more challenging in EM, due to a more fractious regulatory environmentwith many instances of shorting being
illegal or prohibited by regulations12 as well as a less-developed securities lending business in many individual markets.13 However, there
has been progress in the ability to short in EM in recent years.
In some markets, while shorting cash equities is not permitted, there is
an active futures market, which allows market hedging and facilitates
intermediaries to offer short exposure via derivatives. This is the case
in Brazil, Taiwan, and Korea. In China, the domestic market is protected, and shorting is not permitted. However, in addition to being
listed on local exchanges in mainland China, many Chinese companies are also listed in Hong Kong, where there are no restrictions on
foreign investments and where shorting is permitted. In addition,
many EM hedge funds take advantage of other markets to implement
short hedges, as we discuss in detail below.
Parallel with the growth in both the external and local credit markets
for EM has been the growth in derivatives associated with these
securities. Credit default swaps (CDS), have proliferated in EM.15
For example, the Markit EM CDX, an index of sovereign default
protection covering EM external credit broadly, is now a very liquid
instrument, trading on the order of over US$ 500 million daily.16
Individual sovereign CDS also trade with reasonable liquidity for
countries with moderate amounts of outstanding external debt, such
as Russia and Turkey. Also, the development of local currency money
markets and bond markets has generated a vibrant market for interest
rate swaps in the larger EM countries.
The breadth of these EM markets gives managers with the appropriate expertise a large number of ways to express a view on a particular
country or market and to hedge or add exposure. Managers can be
long or short external credit risk, taking a view not only on default
but also on risk premium or spread. They can also be long or short
local currencies.
Any of the positions described above can be used either as a hedge to
existing exposures or as an outright position. For example, if a manager sees value in the prices of industrial company equities in Brazil
but is worried about overall economic growth, they can hedge their
macro risk by entering into a receiver swap, which will profit if growth
disappoints and domestic rates fall, or by shorting the local currency,
which might weaken if the local economy falters.
While it tends to be the macro and relative value players who are most
active in the credit, rates, and currency markets, equity long/short
managers can also benefit from the ability to hedge currency or interest rate risk. In certain situations the debt of state-owned companies
in an emerging country where there are significant macro headwinds
(e.g., Venezuela or Russia), can offer an equity-like return to investors with a flexible mandate.
Regardless of strategy, the existence of these markets creates tremendous opportunities for additional alpha to be generated by EM hedge
fund managers.
Exhibit 11
Historical Performance of HFRI Emerging Markets Index and
MSCI Emerging Markets Index
Return (%)
30
MSCI EM Index
Exhibit 12
Favorable Pattern of Returns for EM Hedge Funds
Annualized Return (%)
15
15
10
5
-15
MSCI EM Index
0
-30
2005 2006
0
2007
2008
2009
2010
2011
2012
2013
10
15
2014
20
25
Annualized Volatility (%)
As of 31 May 2014
The indices listed above are unmanaged and have no fees. It is not possible to invest
directly in an index. Past performance is not a reliable indicator of future results. This is
not intended to represent any product or strategy managed by Lazard.
The indices listed above are unmanaged and have no fees. It is not possible to invest
directly in an index. Past performance is not a reliable indicator of future results. This is
not intended to represent any product or strategy managed by Lazard.
Source: Bloomberg
Conclusion
As Exhibit 10 shows, EM investments have historically been much
more volatile than DM. For investors with the risk tolerance to
be fully exposed to EM market risk, good total returns should
accompany the improving EM fundamental growth story. However,
investors willing to make this choice should expect large potential
drawdowns and an increase in total portfolio risk to accompany
these potential returns. Care might have to be taken in timing an
investors entry into the market, given the impact of capital flows,
the variability in valuations and the price volatility that EM securities
so frequently experience.
Few investors can credibly claim to have this timing skill, and many
readily admit that they do not. Some investors might be unwilling to
consume a large proportion of their total portfolio risk budget with an
EM allocation. Others might seek a better risk-reward outcome for, or
as a complement to, their core EM allocation. For all of these investors, EM hedge funds are a sensible idea worthy of consideration, and
an EM fund of hedge funds with global coverage of the opportunity
set, dedicated portfolio management resources, and specialized experience and skill, may be an efficient implementation of the idea.
10
Appendix 1
Country Classifications
Frontier Markets in MSCI Classification
Americas
Africa
Middle East
Asia
Americas
Argentina
Bosnia
Herzegovinaa
Botswanaa
Bahrain
Bangladesh
Brazil
Bulgaria
Ghanaa
Jordan
Pakistan
Chile
Kenya
Kuwait
Sri Lanka
Colombia
Mauritius
Lebanon
Vietnam
Peru
Morocco
Oman
Nigeria
Palestinea
Tunisia
Saudi Arabiab
Jamaicaa
Trinidad &
Tobagoa
Croatia
Estonia
Lithuania
Kazakhstan
Romania
Serbia
Mexico
Zimbabwea
Europe, Middle
East and Africa
Asia
Czech
Republic
China
Egypt
Indonesia
Greece
Hungary
Poland
Qatar
Russia
South Africa
Slovenia
Turkey
Ukraine
United Arab
Emirates
India
Korea
Malaysia
Philippines
Taiwan
Thailand
As of 10 June 2014
a The MSCI Bosnia Herzegovina Index, the MSCI Botswana Index, the MSCI Ghana Index, the MSCI Jamaica Index, the MSCI Trinidad & Tobago Index, the MSCI Zimbabwe Index, and the
MSCI Palestine IMI are currently stand-alone country indices and are not included in the MSCI Frontier Markets Index. The addition of these country indices to the MSCI Frontier Markets
Index is under consideration.
b The MSCI Saudi Arabia Index is currently not included in the MSCI Frontier Markets Index but is part of the MSCI Gulf Cooperation Council (GCC) Countries Index.
IMF country classifications can be found in the following link: http://www.imf.org/external/pubs/ft/weo/2014/01/pdf/statapp.pdf
Source: MSCI, IMF
Notes
1 Excludes certain countries in the euro zone periphery that have recently joined the ranks of EM, namely Greece and Cyprus.
2 There are many inconsistent definitions (e.g., the countries in the MSCI Emerging Markets Index are not the same as those on the list of countries that the IMF defines as emerging economies). For the purposes of this paper, we will use the definition as described and include Frontier Markets in the broad discussion. Refer to the Appendix 1 for a list of all EM countries and
those in the Frontier subset.
3 Source: MSCI
4 The QFII program was introduced in 2002 and allowed foreign investors access to Chinese stock exchanges in Shanghai and Shenzhen. Prior to the QFII program, foreign investors were prohibited from directly purchasing or selling stocks.
5 These restructurings, first articulated by US Treasury Secretary Nicholas F. Brady in March 1989, involved converting defaulted bank loans into longer-duration bonds with principal collateral
and some coupon protection in the form of US Treasuries. The basic idea was debt relief in exchange for a commitment of economic reform and an assurance of eventual payment. The ease
of transfer of these centrally clearable bonds increased liquidity and tradability, allowing risk to be diversified throughout the global financial community and eventually restoring these countries access to global capital markets. See The EMTA (Emerging Markets Traders Association) for more information. http://www.emta.org/
6 The post-crisis peak was slightly under 14%, but it has dropped back to the 10% range currently, given the strong relative performance of DM versus EM in the last several years.
7 ADRs (American Depositary Receipts) are negotiable certificates issued by a US bank, representing a specified number of shares in a foreign stock that is traded on a US exchange.
8 Source: BNY Mellon
9 Refer to Appendix 1 for a list of Frontier Market countries.
10 Source: Current data from HFR and Eurekahedge. 2000 data is an estimate from Lazard.
11 Gross exposure measures total economic risk and is defined as the gross long portfolio, expressed as a percentage of NAV, added to the gross short portfolio expressed in the same way. The
net exposure measures market risk and is defined as the gross long less the gross short portfolio. Most long/short managers vary their gross exposure between 75% and 200% of NAV and
their net exposure between 25% and 100% of NAV.
12 As of March 2014, Argentina, Brazil, Bulgaria, Chile, China (B shares), Colombia, Croatia, Cyprus, Egypt, Estonia, Greece, Iceland, India, Indonesia, Latvia, Lithuania, Malaysia, Morocco,
Pakistan, Peru, Philippines, Romania, Serbia, Slovak Republic, Slovenia, South Korea, Sri Lanka, Taiwan, Venezuela, and Vietnam are EM and Frontier countries that allow foreign investors to
invest in domestic cash equities but prohibit shorting via cash equities. Synthetic instruments such as equity swaps are used in some of these markets.
13 In order to sell a stock or other security short, the seller must borrow the security. This is accomplished through a securities lending transaction, typically facilitated by a broker/dealer. A summary is available from International Capital Market Association: http://www.bankofengland.co.uk/markets/Documents/gilts/sl_intro_green_9_10.pdf
14 This is Argentina in 2001. Technically, Russia was in default of its external obligations due to cross defaults with its domestic, ruble-denominated Treasury bills called GKOswhich the
country defaulted on in 1998. However, despite defaulting on GKOs, Russia never missed a coupon or principal payment on its external bonds.
15 CDS are contractual agreements where the purchaser receives protection from an event of default in a particular credit in exchange for a series of payments over a specified time frame. The
seller collects the payments in return for absorbing any economic loss in the event of default.
16 Source: Bloomberg
17 The capital markets line (CML) is the theoretical relationship between different investment opportunities in the capital markets with distinct risk and reward characteristics. It should typically
and over timebut does not always in practice or at given points in timerise with a positive slope from lower returns for cash and low-risk instruments on the left of the graph, to higher
returns from equities and other riskier investments on the right side of the graph.
11
Important Information
Published on 11 July 2014.
An investment in any alternative investment is speculative, involves a high degree of risk, and may lose value at an accelerated rate. Privately offered investment vehicles (hedge funds, which
includes funds of funds) are unregistered private investment funds or pools that invest and trade in many different markets, strategies, and instruments. Hedge funds generally are not subject
to regulatory restrictions or oversight. Opportunities for redemptions and transferability of interests in hedge funds are often restricted so investors may not have access to their capital if and
when it is needed. Typically, there is no secondary market for an investors interest in a hedge fund. The fees imposed on hedge fund investments, including management and incentive fees/
allocations and expenses, may offset trading profits. An investor should not invest in any hedge fund unless he or she is prepared to lose all or a substantial portion of his or her investment. These
and any other risks involved in an investment in any hedge fund should be considered carefully before an investment is made.
Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile,
and less subject to governmental supervision than in ones home market. The values of these securities may be affected by changes in currency rates, application of a countrys specific tax laws,
changes in government administration, and economic and monetary policy. Emerging-market securities carry special risks, such as less developed or less efficient trading markets, a lack of
company information, and differing auditing and legal standards. The securities markets of emerging-market countries can be extremely volatile; performance can also be influenced by political,
social, and economic factors affecting companies in emerging-market countries.
Certain information included herein is derived by Lazard in part from an MSCI index or indices (the Index Data). However, MSCI has not reviewed this product or report, and does not endorse
or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express
or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom.
This paper is for informational purposes only. It is not intended to, and does not constitute financial advice, fund management services, an offer of financial products or to enter into any contract
or investment agreement in respect of any product offered by Lazard Asset Management and shall not be considered as an offer or solicitation with respect to any product, security, or service in
any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or unauthorized or otherwise restricted or prohibited.
Australia: FOR WHOLESALE INVESTORS ONLY. Issued by Lazard Asset Management Pacific Co., ABN 13 064 523 619, AFS License 238432, Level 39 Gateway, 1 Macquarie Place,
Sydney NSW 2000. Germany: Issued by Lazard Asset Management (Deutschland) GmbH, Neue Mainzer Strasse 75, D-60311 Frankfurt am Main. Japan: Issued by Lazard Japan Asset
Management K.K., ATT Annex 7th Floor, 2-11-7 Akasaka, Minato-ku, Tokyo 107-0052. Korea: Issued by Lazard Korea Asset Management Co. Ltd., 10F Seoul Finance Center, 136 Sejongdaero, Jung-gu, Seoul, 100-768. United Kingdom: FOR PROFESSIONAL INVESTORS ONLY. Issued by Lazard Asset Management Ltd., 50 Stratton Street, London W1J 8LL. Registered in
England Number 525667. Authorised and regulated by the Financial Conduct Authority (FCA). Singapore: Issued by Lazard Asset Management (Singapore) Pte. Ltd., 1 Raffles Place, #15-02
One Raffles Place Tower 1, Singapore 048616. Company Registration Number 201135005W. This document is for institutional investors or accredited investors as defined under the
Securities and Futures Act, Chapter 289 of Singapore and may not be distributed to any other person. United States: Issued by Lazard Asset Management LLC, 30 Rockefeller Plaza, New
York, NY 10112.
LR24163