Hedge fund managers who focus on emerging markets have produced returns that are, well, all over the map.
A host of positive and negative shocks — bold new leaders, potential wars, drops in currencies and commodity prices — have led to huge disparities in investment returns.
India-focused hedge funds, for example, are up an average of 41.9 percent net of fees in 2014 through October, according to industry data tracker HFR. Thanks to optimism about economic reform and growth under new Prime Minister Narendra Modi, the South Asian giant is by far the best performing hedge fund strategy in the world this year.
Hedge funds invested in Russia, on the other hand, have lost an average of 12 percent net of fees, per HFR, perhaps unsurprising given the conflict in Ukraine, a record low for the rouble and falling oil prices. Latin America-focused funds are also down 3.5 percent on average, also hit by declining currencies, such as the Brazilian real versus the mighty U.S. dollar.
"Buying or avoiding all emerging markets as a group doesn't work anymore," said Marko Dimitrijević, founder of emerging markets-focused hedge fund firm Everest Capital. "Selectivity is the key."
Dimitrijević said the Middle East and India were "the places to be" in 2014 for $3 billion Everest while Brazil, Russia and China "could be easily avoided" (performance of China-focused funds has been muted; the average manager is up 2.66 percent in 2014 through October, according to HFR).
That selectivity worked well: the Everest Capital Emerging Markets hedge fund is up 18.6 percent in 2014 through October, according to investor materials obtained by CNBC.com (the firm declined to comment on performance).
India has been the big winner for 2014.
"India is one of the few countries with real growth that looks to accelerate, whereas the rest of the world is slowing down," said Pratik Sharma, managing director of $150 million Atyant Capital. The Atyant Capital India Fund is up 65 percent in the first three quarters of 2014 by focusing on bullish long bets on relatively small stocks.
Investor optimism on India centers on Modi, a pro-business politician who observers hope will stimulate growth.
"The Modi reform agenda is aggressive, progressive and big," Mark Yusko, CIO of hedge fund allocator Morgan Creek Capital Management, said in a recent letter to clients. "Great leaders think big, dream big, act big, and Modi fits that description to a tee."
Yusko noted that investors will be rewarded for having exposure to industries and companies that will help India grow, including engineering, construction, electric power, banking, insurance, the internet and retail, according to the letter.
"There are so many opportunities in India that it is difficult to pick only a few to discuss," Yusko wrote.
Dimitrijević of Everest also likes India — and Mexico — in 2015 because of continued reform.
"We believe in their reform agendas, they are doing the right things from a macro standpoint, and their currencies are also more likely to hold their value against the U.S. dollar," Dimitrijević said.
The continued strength of the U.S. dollar may hurt other emerging markets next year.
"A strong dollar will be a headwind for South Africa, Turkey and some of the commodity-linked markets," Dimitrijević said.
But currency and other volatility may also create opportunity for relatively nimble hedge funds.
"Falling foreign-currency reserves, higher import costs and lower oil revenue have increased the EM risk paradigm into year end, resulting in greater macroeconomic and geopolitical uncertainty, but also increased opportunity across emerging markets," HFR president Kenneth Heinz said in a recent report.
Big institutional investors appear to be buying in to the relatively small and volatile hedge fund strategy.
Some 32 percent of endowments and foundations surveyed by investment consultant NEPC in the second quarter said that emerging market-focused hedge funds would generate the highest returns over the next 5 to 7 years, higher than any other strategy.
Emerging market hedge funds saw clients allocate an additional $3.5 billion in 2014 through September, nearly half of the $6.45 billion in inflows from 2013, according to HFR. That brings total hedge fund capital invested in emerging market hedge funds to $185 billion.