Hedge funds are scrambling to reassess emerging market positions after US-Israel strikes on Iran sent EM stocks and currencies tumbling. The MSCI EM index dropped nearly 2% Monday as markets from Turkey to India faced selling pressure, marking a sharp reversal from the 14% year-to-date gains these markets had enjoyed.

Low oil prices and a weakening dollar had fueled the EM rally, reducing import costs for energy-dependent economies. But Brent crude surged 6% as investors fled to haven assets, strengthening the dollar and threatening the trade. Goldman Sachs data showed hedge fund allocations to EM stocks hovering near five-year highs before the conflict erupted.

Portfolio managers warn the crowded EM trade faces significant pressure if the Iran conflict persists. While some investors are adding protection through credit default swaps, others are reducing exposure entirely. Fidelity International is actively reviewing its overweight position in emerging Asian economies given their high oil import dependence. The coming weeks will test whether this represents a temporary pullback or the start of a broader EM selloff.