Many institutional investors are directing a significant portion of their emerging market allocations to hedge funds.

Emerging market equities constituted 14.1 percent of new products under consideration or in development in 2013, according to new research.

Cerulli Associates discloses this finding in the second quarter 2014 report of the Cerulli Edge: Institutional Edition.” The report examines risk factors, changing approaches to asset allocation and other trends that are guiding institutional investors’ investment choices.

The report indicates that many institutional investors are directing a significant portion of their emerging market allocations to hedge funds: portfolios of investments that use leveraged long, short and derivative positions to generate high returns.

“[Most] managers surveyed by Cerulli during the 12-month period ended 1Q 2013 reported requests for emerging markets hedge funds,” the report states. “When Cerulli surveyed gatekeepers in 2013, they mentioned plans to push the use of emerging markets equities and alternative assets in institutions’ portfolios during the coming two years.

“More recently, disappointing returns prompted some investors to withdraw money from emerging markets, the report adds. “Although conflict in Ukraine rattled nerves, disappointment in emerging markets cannot be blamed entirely on political unrest.”

The report also identifies “misguided management decisions” as a reason for the subpar performance in some emerging markets.

The study indicates that international equities remain the predominant focus of all new products under consideration or development (24.1 percent), followed by global equities (14.9 percent). Occupying the fourth and fifth positions (after emerging markets, in third place) are world bonds (13.5 percent) and asset allocation/global tactical asset allocation strategies (10.6 percent).