Handbook of Hedge Funds

14

Emerging Markets

Emerging market investing found its official roots in the mid-1980s when the International Finance Corporation (IFC), an arm of the World Bank, decided to set up the first mutual fund focusing on securities from emerging markets.¹⁴² The Emerging Market Growth Fund initially started with a seed capital of $50 million, primarily provided by the IFC alongside a few pension funds and insurance companies that expressed interest. Its investment universe covered 32 countries with a market capitalization of $67 billion, i.e. approximately 2.5% of the world markets. Since then, interest for emerging markets has dramatically surged, thanks to the epic transformations that took place in these countries. Across the globe, democratically elected governments have replaced dictatorships, artificially pegged currencies have become freely floated, financial disclosure has replaced secrecy, and state-owned companies have been finally privatized. Many emerging countries have come a long way in establishing sound fiscal and monetary policies, opening their financial markets, addressing corporate governance, and improving their economic fundamentals. Despite several crises on the way, emerging markets as a group have proved they could sustain high growth and attract capital. As summarized by Mark Mobius, the manager of the Franklin-Templeton Group: “Emerging markets may be a euphemism, but it is also a declaration of hope and faith. Although some of the stock markets of developing ...