Despite apparent bullishness about emerging markets (EMs) among investors in recent months, EM hedge funds saw net withdrawals of $1.5 billion in the second quarter, according to Chicago-based Hedge Fund Research (HFR).

Those redemptions were concentrated in emerging Asia and Russia, while investors allocated new capital to hedge funds focusing on Latin America and the Middle East and North Africa. The figures for Russia are perhaps not surprising, given the dire performance of the country's stock market in 2009 and for the first half of this year, although there has been a recent rebound.

Taking into account that EM hedge funds suffered redemptions of more than $550 million in the first quarter, investors have withdrawn more than $2 billion from EM hedge funds in the first half.

The last quarter also represents the second consecutive quarter and the seventh in the last eight in which EM hedge funds have experienced a net capital withdrawal. Combining second-quarter outflows with performance-based losses, total capital invested in EM hedge funds fell by $3.2 billion, to end the quarter at just under $95 billion.

By investment strategy, EM funds in equity hedge experienced $1.8 billion in redemptions, which was only partially offset by inflows of $320 million to macro EM funds, says HFR.

However, EM managers are bucking the trend of the overall hedge-fund industry, which took in net capital of $9.6 billion for the second quarter and $23 billion during the first half.

“Changes in global growth expectations, prospective currency volatility and commodity-specific market influences have resulted in a near-term decrease in investor risk tolerance for emerging-market hedge-fund exposure,” says Kenneth Heinz, president of HFR in Chicago.

“While many of these risks have persisted into 3Q10, many powerful trends in EM equities, sovereign credits and commodities have also reversed,” he adds. “Hedge-fund investors considering the tactical, cyclical and overall positive performance dynamics of EM hedge funds will look to access these trends in coming quarters.”

As both importers and exporters of individual commodities, most EM economies are sensitive to commodity price movements, which can be detrimental, beneficial or variable, depending on the specific economy and price movement, says HFR.

Hedge funds focused on metals, agricultural and energy commodities have all experienced negative performance in 2010, with the HFRX Commodity Index down -5.6% year-to-date as of the end of July.