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Hedge Fund Investors Look to Liquidity, Flexibility of Emerging Markets

Predicting a positive but shaky year ahead, alternative investors are looking abroad to reap the benefits of the global recovery.

Nearly half of the 1,300 alternative investors surveyed by Brighton House Associates in the fourth quarter said they were interested in hedge funds following global macro trends because of the strategy's broad economic approach and highly liquid structure.

Interest in emerging markets by U.S. investors has burgeoned over the past two years, as economies in these markets fared far better than the badly damaged American economy. As American credit froze to a near halt, banks in China, India and Brazil, for instance, continued to lend freely, with some of these countries even posting double-digit GDP growth as the U.S. contracted for four consecutive quarters.

Now, as alternative investors prepare for what they believe will be a true-to-form global recovery this year, they are looking toward these developing economies to give them the flexibility required to take advantage of the volatility-and profit opportunities-ahead.

"Global macro managers are uniquely positioned to exploit different growth rates and the resulting volatility, and profit by using a diversified range of arbitrage and foreign exchange strategies," the Brighton report said.

Alternative investors are also looking to global macro trends because of their unique structure. Not only do they offer no lock-up periods, they also typically hold highly liquid investments. Several global macro fund managers said that they could move their entire portfolios to cash within 24 hours. In today's environment of fear and redemptions, such flexibility is an enormous asset.

As the economies in these developed markets continue to grow at unprecedented levels, the demand for natural resources has grown as well. More than 20% of alternative investors from the Brighton report were interested in hedge funds that focused on natural resources and energy strategies.

An increasing number of investors are looking to China, for instance, which is successfully transforming itself from an export-driven economy into one driven by its own consumers. As China builds the infrastructure it needs to support further growth, alternative investors believe a rising need for raw materials is ahead.

"There is a huge disparity between the rich east and the poor central and west in China, and this is all part of a strategic plan to get growth going there," said Burton Malkiel, a Princeton University economist and longtime proponent of investing in China.

"The government wants to get growth going in the center and west, so they're building railroads to the west and airports that have no traffic yet," he said. "There will be overcapacity for a while, but the potential absorption of that excess capacity is enormous, and the cities they're building will fill it."

Investors looking toward natural resources funds are also interested in resource-rich Brazil, whose water and natural resource reserves could bode well for investors in it for the long haul.

"Brazil has a lot of water and is a potential bread basket for the world," Malkiel said. "One of the problems with China is it's very dry, so China will be importing more and more food as people in the center and west get richer, not only because the biggest oil discovery in America was made just outside Brazil or because they're rich in raw materials, but also because they're likely to be increasingly an agricultural powerhouse."

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