As professional investors, we consider this information inefficiency one of the most exciting things about emerging markets investing.

Essentially, the deficiency of data means that new information is priced in very slowly across emerging markets. In developed markets, such as the US or Japan, headlines can impact equity prices in a matter of hours or just minutes. Yet, in emerging markets, it can take days, weeks or even months for information to be factored into securities prices. As a result, sophisticated investors immersed in these markets and hyper-focused on security research can act quickly and capitalize on an event before the stock market actually prices in the information.

In short, inefficiencies can equate to opportunities for those investors who do their homework and have the resources necessary to assess and act on the data.

Winning With A Succession of Singles
Given the importance of the emerging economies to global growth going forward, we believe most investors should have some level of exposure to the space. However, the risks of emerging markets investing are clearly real, albeit different from just a few years ago.

Recognizing these risks, as well as the tremendous opportunities available in emerging markets, we believe a professionally managed long/short equity strategy can be an appropriate means of exposure for a great majority of investors. A long/short approach seeks to manage volatility and market risk while focusing on enhancing returns through investment in specifically researched and selected stocks.

Essentially, we buy (long) stocks that we believe will appreciate in price and at the same time sell (short) stocks we believe will depreciate, giving us the ability to efficiently dial up or down our exposure to market risk. Compared with the traditional long-only, "all-in" approach, we believe this is an excellent way to tap the positive performance of emerging markets equities, while managing the broader market risks.

When it comes to emerging markets investing, you can certainly hit a grand slam every once in a while. But in our view, winning with a strong succession of singles is just as gratifying -- and generates less angst along the way. We believe a long/short strategy may be a particularly attractive option for risk-conscious investors or for those taking their first swing at emerging markets stocks.

Jeff Shen, Ph.D., is a managing director and portfolio manager at BlackRock and head of Asia Pacific and Emerging Market Equity within the firm's Scientific Active Equity (SAE) Group. Rodolfo Martell, Ph.D., is a director and portfolio manager at BlackRock and a member of the SAE team. Together they manage the BlackRock Long/Short Emerging Markets Equity Fund and several other portfolios.

 

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