The latest HFR emerging markets hedge fund industry report reveals that hedge fund capital invested in emerging markets posted only a narrow gain for the third quarter in the face of higher currency and commodity volatility.

Investment in the third quarter increased by $700m to $185.15bn. EM hedge fund inflows total $3.5bn for the first three quarters of 2014, just over half the $6.45bn recorded in 2013.

The HFRI EM Russia/Eastern Europe index fell 8.3% as Russian equities posted steep declines and the rouble breached a historic low versus the US dollar. Total hedge fund capital invested in Russia fell to below $25bn across approximately 170 hedge funds.

The HFRI EM Latin America index declined 5.4% in as the Brazilian real fell to a 10-year low against the dollar. Total hedge fund capital invested in Latin America declined to below $11bn across approximately 110 hedge funds.

Hedge funds in emerging Asia and the Middle East have posted gains recently, increasing the EM capital base in these regions. The HFRI EM India index gained 4% and has extended gains into early Q4, bringing year-to-date performance through October to 41.9%, leading all regional hedge fund indices.

Similarly, the HFRI EM China index gained 2.8% in Q3 and 1.7% in October, bringing year-to-date performance to 2.7%. Total hedge fund capital invested in emerging Asia increased to nearly $50bn, an increase of $4bn from 2013.

The HFRI EM MENA index gained 3.9%, though a decline in early Q4 reduced year-to-date performance to 7.2%. Nearly 50 hedge funds managing over $4bn invest with a specific regional focus on the Middle East.

“Emerging markets hedge funds have experienced intense pressure recently as a result of sharp local currency depreciations and falling oil prices, tactically utilising short exposure and sophisticated strategies to mitigate downside volatility and monetise opportunities created by fluid dislocations,” stated Kenneth Heinz, president HFR.

“Falling foreign currency reserves, higher import costs and lower oil revenue have increased the EM risk paradigm into year end, resulting in greater macroeconomic and geopolitical uncertainty, but also increased opportunity. EM hedge funds typically experience a sharp performance recovery following periods of market stress and investors who maintain or increase allocations in the current environment are likely to benefit in coming months and quarters from this recovery.”