Hedge funds are re-evaluating their positions in emerging markets following US and Israeli strikes on Iran, which have rattled equities and currencies across developing economies, according to a report by the Financial Times.

The MSCI Emerging Markets Index fell nearly 2% on Monday, with notable declines in Turkey and India. JPMorgan’s EM currency index dropped 0.7%, reflecting broader pressure on emerging market assets.

Emerging markets had been strong in early 2026, with the MSCI EM index up 14% through last Friday, supported by a weaker US dollar and low oil prices that eased the cost of imports and debt service for developing countries. However, the recent geopolitical events have reversed some of those gains, sending the dollar higher and pushing Brent crude up around 6%, with Asian and European gas prices also rising.

Investors are particularly cautious about leverage in EM equities and fixed income, which had been a popular one-way trade. India’s Nifty 50 fell 1.2%, Hong Kong’s Hang Seng Index dropped 2.1%, Taiwan’s Taiex declined 0.9%, and Turkey’s Bist 100 slid 2.7%.

Hedge funds had heavily increased exposure to EM stocks and local debt, with allocations near five-year highs, according to Goldman Sachs prime brokerage data. Some investors have reduced positions in countries heavily reliant on oil imports, including Turkey and Egypt, while others are hedging risk through credit default swaps and forward currency bets, anticipating a short-lived conflict.

Despite the volatility, experts note that EM fundamentals remain relatively sound, with lower current account deficits and reduced dependence on foreign capital flows. Market participants said serious outflows have not yet materialised, and a broader liquidity crisis in emerging markets has been avoided for now.

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