The International Monetary Fund warned that emerging markets are increasingly exposed to volatile hedge‑fund capital, a risk that has sharpened amid the Iran‑related war in the Middle East. Foreign investors have poured roughly $4 trillion into EM stocks and bonds since 2008, with debt holdings now averaging 15 % of regional GDP. Non‑bank sources account for four‑fifths of this inflow and raise systemic risk concerns.

Eightfold growth in foreign purchases means that hedge funds and investment funds now dominate EM financing, a share twice that of two decades ago. When the VIX spiked by about seven points—mirroring the 2022 rate‑hike cycle—hedge‑fund holdings of emerging securities fell 1.3 %, double the drop seen in mutual funds. Such sensitivity can trigger sharp currency depreciation in markets and higher borrowing costs.

The IMF cautioned that a sudden retreat of hedge‑fund money could tighten external financing, especially as private‑credit lending to EM firms has ballooned to $50‑$100 billion. Recent pull‑outs, such as $8 billion fleeing Egyptian debt, already pressure local currencies and reserves. Policymakers must therefore monitor non‑bank capital flows to prevent a financing crunch that could stall growth.