Hedge funds to favor BRIC not PIIGS in 2010: Lipper

ZURICH Fri Jan 15, 2010 9:08am EST

ZURICH (Reuters) - The fast-growing BRIC group of economies will be back in favor in 2010 among emerging markets-focused hedge fund managers, who may shun European countries slammed by recession, an industry expert said.

While strong growth is expected in Brazil, Russia, India and China, the European Commission expects the fiscal position of so-called PIIGS -- Portugal, Ireland, Italy, Greece and Spain -- to worsen even further in 2010.

"Concerns about absorption of new government bond issues will affect the intermediate-to-long sector of the yield curve in those countries," Lipper hedge fund research head Aureliano Gentilini told Reuters on Friday.

"Rating agencies will downgrade further the credit rating of PIIGS countries."

New Lipper research said India-focused investors will be the cornerstone of net sales in the Asian region in 2010, with hedge funds focused on emerging markets strategies accounting for a large portion of capital inflows.

China and Brazil are also expected to see strong inflows, although these may be less significant in Russia where political and governance issues remain worrying for asset managers.

The research says single manager hedge funds will see about $100 billion in new money in 2010 after two consecutive years of outflows. Average single fund returns of 10 percent will propel assets to $1.86 trillion by the end of the year, Lipper said.

Gentilini said funds of hedge funds will fare less well, with mixed flows over the year.

"There are questions about whether funds of funds are sufficiently diversified. We have already seen a trend of more experienced institutions shifting toward investments in single funds rather than funds of funds," said Gentilini.

The proportion of total hedge fund assets held by funds of funds will slip to 25 percent at the end of 2010 from 33 percent in 2009, Gentilini said.

In single manager hedge funds, the alpha component, or the ability to choose securities which will outperform the broader market, will be more relevant in 2010 than in 2009, he said.

"Equity market conditions will be choppy, and alpha drivers such as stock picking skills will be more important than beta, or the ability to replicate market trends," he said.