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from Global Investing:

Emerging markets facing current account pain

Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big  funding shortfalls.

The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of "deficit" economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says,  predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.

Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.

There are some supportive factors however. The Fed's signal this week that  U.S. interest rates are unlikely to rise before 2014 shows  that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations' balance sheets. Second, as growth eases, so will the deficits.  For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:

What will happen once (developed market) rates are raised is another story, and emerging markets would better have fixed their main imbalances when the global monetary normalisation begins.

And the award for best hedge fund goes to….

Take a bow George Soros, Trafalgar Capital, King Street, Credit Agricole and a host of others.

Those lovely people at Lipper (wholly-owned by Thomson Reuters, I should note) have handed out the gongs for the top hedge funds in 2009. The awards pick out the managers delivering the best consistent returns over three years among participants the Lipper TASS database, divvying up the goodwill between strategies and regions to give a global snapshot of the leading performers.

Soros Fund Management is picked for best offshore multi-strategy fund while King Street gets the prize for best North American event-driven fund. Credit Agricole’s CAAM Invest VaR 20 I EUR fund wins for Global Macro in Europe.

There are too many winners to list here, so click the link above to look at the definitive guide. Worth noting though that B & P Asset Management (Bermuda) looks like the only firm to grab two accolades, for fixed income arbitrage and multi-strategy funds of funds in Europe.

As we’re measuring consistent returns here, it strikes me as shame that the kind of curiously steady performance of the sort posted by Bernie Madoff and K1 has started to look like a new red flag for potential investors.

Return to sender

The rush by traditional asset managers to embrace absolute return products has failed to impress investors, who are now switching to cheaper, passive investing. But what will fill the revenue hole left by these high margin products is far from clear.

Aymeric Poizot, a senior director at Fitch Ratings, points out that many of the alternative offerings developed by traditional managers in the boom years have been quietly wound up, or had their resources reduced. For example, Fortis Investments has closed some of its internal hedge funds, whilst heavy redemptions have hit alternative offerings at Credit Agricole. SSgA also wound up its own hedge fund unit at the end of 2007.

Other mainstream managers have reappraised their 130/30 offerings – long/short equity products which Poizot says have at best just delivered benchmark performance. Investors have been voting with their feet, switching to money market funds last year, and passive investing this year.

This is hitting fees at traditional asset management houses, as 100 billion euros of money market funds are needed to generate the same revenues as 10 billion euros of high margin products. “When the market is up, no one cares about paying 80 basis points for beta,” said Poizot at a briefing on Tuesday. “But when the market is down, investors question whether the fees are justified.”

Some managers like Natixis Global Asset Management have opted to purchase hedge fund specialists to overcome any cultural or operational issues which may have bedevilled running absolute return products in-house.

Poizot said that he was not sure having an absolute return process within a traditional organisation would be viable going forwards, and that in any case, absolute return would have to change. He pointed out that many absolute return products were sold as “Libor plus”, when they should have been more about capturing two-thirds of any upside and preserving some capital in a down market.

“Absolute return was more a marketing concept than a reality,” he said.