The plunge in emerging markets is taking a bite out of the performance of funds managed by some of the biggest names on Wall Street, including BlackRock, Brevan Howard and T. Rowe Price.
Some mutual funds are already down 10 percent so far this year, thanks to declining stocks and currencies. And that drop has intensified selling pressure as investors rush to pull more money out.
"It has been a disappointing beginning of the year," said Will Landers, a BlackRock equity portfolio manager with close to $4 billion in assets under management. The BlackRock Latin America Fund is off 10 percent this year.
Generally, hedge funds appear to be weathering the sell-off better. Many managers reduced their exposure to emerging markets late last year because of shaky economic prospects, and the current volatility creates more opportunities for those who use short strategies.
Emerging markets had been the darlings of the financial world between 2009 and early 2013, driven by a belief that countries such as China and Brazil would lead global growth in the next few years, while developed world economies would remain nearly stagnant.
But emerging markets investors have turned nervous for many reasons, from the U.S. Federal Reserve's pullback in its bond buying program to upcoming elections in India, Brazil, Turkey, Indonesia and elsewhere. The street battles between protesters and the authorities in Ukraine, turmoil over elections in Thailand, and bomb blasts in Egypt are not helping either.
So jittery are investors that a shock 425-basis-point hike in interest rates by Turkey's central bank last week did not even buy the currency a 24-hour reprieve before selling started again.
Illustrative of this is the iShares MSCI Emerging Markets fund, which is down 9.7 percent in 2014 through Wednesday. The ETF - the second-most actively traded in the United States - ended last year down 5.8 percent and rose 17 percent in 2012.
Fund investors worldwide pulled $6.4 billion from emerging market stock funds in the week ended January 29, their biggest outflows since August 2011, according to data from a Bank of America Merrill Lynch Global Research report.
And investors and analysts say that the debt markets can be just as treacherous.
"I'd advise only those investors with much higher risk tolerances to invest in emerging market debt as they become much more volatile," David Sekera, corporate bond strategist with Morningstar, said on a webcast.
Brazil, Bane, or benefit?
Brazil, Latin America's largest economy, has dragged down many funds this year, including T. Rowe Price's Latin America Fund, which has declined about 11 percent.
The Dreyfus Brazil equity fund and the Fidelity Latin America fund are also both down about 11 percent.
Investors are still not swayed, however, to trim their exposure in Brazil.
"Even after the 13-14-15 percent declines, I am sticking with my big bets. I am thinking long-term," said Jose Costa Buck, who oversees the T. Rowe fund, adding that he plans to hold many of his stocks for "at least three years."
BlackRock's Landers shares the same sentiment and sees opportunity in the selling pressure. He said in an email to Reuters: "For a long-term investor, this offers an opportunity to buy some cheap stocks," citing Vale, down about 6 percent so far in 2014; Itau, down about 0.4 percent; and Ambev, down about 9.5 percent.
Brazil is also grappling with other concerns, from outdated infrastructure to a stubbornly high inflation rate, and a reputation for state intervention that has spooked many investors.
Landers cautioned that significant improvements in the Brazilian economy probably will not happen until after the October presidential election.
Scott Mather, head of global portfolio management at Pimco, also signaled he sees the declines as an opportunity. He tweeted on Wednesday: "Indiscriminate selling in EM bonds & panic buying of developed world is subsiding. Time for value investors to consider stepping in."
Dreyfus and Fidelity declined to comment.
Latin America is not the only weak spot: Funds focused on Russia, China, emerging Europe, and some other emerging market areas, are also down 9 percent or more so far this year.
Some hedge funds have not been immune to the plunge.
Brevan Howard's Emerging Markets Strategies Master Fund, one of the world's largest EM funds, was down 1.6 percent by January 24, data seen by Reuters shows. This follows losses of 15 percent racked up last year.
Computer-driven funds that bet on price trends their models seek to predict - commonly known as commodity trading advisors - sank after volatility upended those models.
Aspect Capital's main fund fell 5.64 percent in January alone, following a drop of 4.4 percent last year and 10.7 percent in 2012, data seen by Reuters shows.
Winton Capital - a $25-billion plus fund that ranks as one of the largest in Europe - had lost a little more than 2 percent in its Futures Fund through January 29, performance figures show. It rose 9.4 pct in 2013 but fell 3.56 pct in 2012, according to data seen by Reuters.
Not all submerging
Still, some funds have gained, outperforming benchmarks.
Among those are the Ashmore Emerging Markets Frontier Equity Fund, up about 2.5 percent, the HSBC Frontier Markets Fund, up 1.3 percent, and the Harding Loevner Frontier Emerging Markets Fund, up 1 percent.
Credit managers have been selling out of local currency bonds - a big loser for long-only funds in January - in favor of dollar-denominated assets, reckoning the risk of further currency falls had grown, several investors in credit hedge funds said.
A handful of macro funds, which profit from speculating on shifts in the global economy, have even made money after betting on the U.S. dollar rising.
The flagship fund of Pharo Management, which runs around $3 billion in assets, had gained 2.2 percent by January 17, according to data seen by Reuters.
Some currency funds also performed well, thanks largely to bets the U.S. dollar would strengthen. Boston-based P/E Investments rose about 10 percent in the first month of the year, one of its investors said.
Clem Miller, investment strategist at Wilmington Trust Investment Advisors, cautioned, however, that investors might not be ready to stop dumping emerging markets just yet: "Panic plays a big role when it comes to emerging markets."