Standard emerging market benchmarks are misleading. Equity indices are heavily concentrated in a few countries, while bond indices suffer from inconsistent duration, ignore the vast derivatives market, and create unintended G10 currency bets due to their dollar-basing.
Because emerging market cycles are so unpredictable and violent, any mid-sized manager focused on a single asset class or region is not questioning *if* they will go out of business, but *when*. Business model diversification is the only path to long-term survival.
In emerging markets, where 'six sigma' events happen frequently, statistical risk models like Value at Risk are ineffective. A more robust approach is scenario analysis, stress-testing portfolios against specific historical crises like 1998 or 2008 to understand true vulnerabilities.
For years, China acted as a primary capital magnet within emerging markets. However, recent policy shifts have increased unpredictability, changing its role in global portfolios from a long-term, strategic investment to a short-term, tactical trade.
The developed market private investing model of single-asset-class funds (PE, credit, infra) is poorly suited for emerging markets. The deal flow in these regions is insufficient to support such specialized funds, leading to poor capital deployment and failing GPs.
During a crisis, equity and loan portfolios can become completely illiquid. However, currency liquidity almost never disappears. Therefore, a deep capability in FX instruments is the most critical risk management tool for an EM investor, allowing them to hedge when other markets are closed.
Volunteering for a role in a less popular location, like Japan in the 1980s, can provide unparalleled experience. Nick Rohatyn gained ten years of experience in four, managing 50 people by age 28, because he went where others wouldn't, proving opportunity lies off the beaten path.
After the 2008 crisis, 95% of new hedge fund allocations went to firms with over $5B AUM. This made organic growth for smaller managers nearly impossible. Acquiring other GPs became the only viable strategy to achieve necessary scale, track records, and LP relationships.
Given the known flaws in EM benchmarks (duration, currency, instrument type), it's possible to construct a passive, rules-based strategy to correct them. This 'smart beta' approach can systematically deliver a better Sharpe ratio than the underlying index, even if absolute returns are lower before leverage.
Within any emerging market country, the annual return dispersion between equities, local debt, and hard currency debt is enormous. An investor who can consistently pick the winning asset class, even just over 50% of the time, will generate superior long-term returns due to this massive performance gap.