Investors are losing faith in emerging markets hedge funds, according to the Hedge Fund Research Emerging Markets Report, which recorded a net withdrawal of $1.5 billion in EM hedge funds for the second quarter of 2010.

The figures represent the seventh quarter in the last eight in which EM hedge funds have experienced a net capital withdrawal. Total withdrawals for the first half of 2010 amounted to $2 billion, to which the second quarter contributed 75 per cent of the outflow.

Outflows combined with performance-based losses showed the decline in capital invested to be $3.2 billion for the quarter, closing the three-month period at just under $95 billion.

Total inflow for the second quarter was $9.6 billion, a smaller proportion of the total inflow for the first half which was $23 billion.

In comparison with the second quarter of 2009, regional attitudes shifted modestly, showing that investors were now withdrawing funds dedicated to Russia and Emerging Asia and focusing their investment in Latin America and the Middle East.

The strategy that suffered the most redemptions was equity hedge, which experienced $1.8 billion of withdrawals.

Commodities also took a hit with metals, agricultural and energy hedge funds experiencing negative performances year-to-date.

“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,” said Kenneth Heinz, president of Hedge Fund Research.

“While many of these risks have persisted into Q3 2010, many powerful trends in EM equities, sovereign credits and commodities have also reversed; 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,” he added.

Hedge Fund Research, based in Chicago, was founded in 1992 and actively tracks more than 6,500 hedge funds and funds of hedge funds.