The International Monetary Fund has warned that emerging markets (EMs) are increasingly exposed to volatile, non-bank sources of capital, such as hedge funds, making them more sensitive to global shocks like the ongoing Iran conflict, according to a report by the Financial Times.

Foreign investment in EM stocks and bonds has surged eightfold since the 2008 financial crisis, with cumulative inflows approaching $4 trillion in 2025, mostly in debt instruments. Debt held by foreign investors now averages 15% of EM GDP, up from 9% in 2006. About 80% of this capital comes from non-bank entities, double the share from two decades ago.

The IMF highlighted that such flows are highly reactive to global risk conditions. For instance, a 7-point rise in the VIX volatility index has been linked to a 1.3% drop in hedge fund holdings of EM securities, compared with a 0.6% decline for mutual funds and little change for insurance or pension funds.

Recent market turbulence illustrates the risk: the Egyptian pound has fallen nearly 15% as investors withdrew roughly $8 billion from local debt markets, while Turkey’s gold reserves declined as its central bank intervened to support the lira.

The IMF also noted rapid growth in private credit, with non-bank direct lending to EM companies rising fivefold over the past decade to $50–$100bn, further increasing vulnerability.