Overall hedge fund capital invested in emerging markets grew by $3.5 billion in 2011, an increase of 3 per cent and a modest net capital inflow of $200 million.The Chicago-based research house said the HFRI Emerging Markets (Total) Index declined nearly 14 per cent last year. However things picked up last month and the index gained 4.4 per cent in January.

The worst period in 2011 was, unsurprisingly, the second half of the year and investors withdrew $2.2 billion from such funds in the fourth quarter.

The strongest strategy for capital growth in EM hedge funds was equity hedge strategies, which saw $1.7 billion in inflows and $8.7 billion in performance-based asset growth last year.

January was the ninth month since 2008 that EM hedge funds exceeded a 4 per cent gain.

The sharpest contrast was seen in the HFRI Russia/Eastern Europe Index, which gained 5.9 per cent in January, following a decline of 18.5 percent in 2011. Similarly, the HFRI Latin America Index gained 6 per cent last month after declining 10.4 per cent last year. The HFRX MENA Index and HFRI Asia ex-Japan Index gained 3.4 and 4 per cent respectively in January, after having dropped 11.7 and 18 per cent in 2011.

“Global investors exhibited a level of risk aversion toward EM hedge funds similar to that of the broader hedge fund industry in 2011, but early 2012 performance may constitute a crucial inflection point for investor risk tolerance,” Kenneth Heinz, president of HFR. “Hedge funds investing in emerging markets have outperformed both the broader hedge fund industry and developed market equities since 1990.”

Hedge fund capital invested in emerging markets stood at $117.8 billion globally at the end of December, according to HFR.