Emerging market for alpha? Good hedge funds had a great decade as usual and many emerging markets also did well. Ten years ago most investors avoided developing countries and loved developed because of the 1990s bubble, Asia crisis and Russia default. When will the crowd learn to buy the unpopular and short sell the trendy? Not yet, judging by all the new institutional RFPs for long only emerging market mandates and the retail money swarming into similar mutual funds. Even more so than developed markets, emerging markets offer alpha opportunities from long/short security selection, timing and hedging, not buy and hold beta.

Lost decade? I ended up with an +18.59% CAGR after fees for the 2000s. Some did better, but that's not bad considering the level of diversification and limited risk. I select alpha vendors for most strategies but manage some special situations myself if I have an analytical advantage. I use global macro black boxes and micro risk metrics that seem to have predictive value. Emerging markets alpha has been a favorite strategy. One year ago and ten years ago many experts said to avoid "risky" emerging markets and "dangerous" hedge funds! Financial science is not rocket science; it's more complicated than that. I focus on robust mathematical models and geographic facts, not economic theories. I always strive to be long only of alpha.

Below we highlight the performance of the major equity indices for 82 countries since the close on Tuesday. As shown, both the G-7 and BRIC countries sit at the top of the list of worst performers. The countries that have held up better are located mainly in the Middle East, Africa, and Eastern Europe.

Combining the BRICs and the G-7, Russia has done the worst since Tuesday with a decline of 6.33%. But Brazil and the US are not far behind with declines of more than 5%. Italy, France, and Germany are all down around 4.75%, followed by Britain at -3.81%. There has been lots of talk about China partly at fault for the global sell-off, but the country itself is down just 3.64% since 1/19. Japan has by far done the best of the G-7 and BRIC countries over the last three days with a decline of just 1.62%.

This essay is based on the Premium Update posted on January 21st, 2010

Although the picture this past year has been bleak, there are plenty of bright spots around the world. We touched on this point in one of our recent essays, and we would like to elaborate further. In economic terms, this decade was very kind to countries like China, India, Brazil and Indonesia. If you exclude the U.S., they also happen to be the four most populous nations in the world (The U.S. ranks third.) Together, they account for more than 40 per cent of the world’s population. All four countries have made remarkable progress this decade in terms of economic growth and standards of living.