Some investors in global and emerging market funds are starting to become nervous that such markets have risen too far, too fast (see Asian Investor article). After a nice run since early March, investors in emerging market funds that are tracked by EPFR Global have seen investors pulling a net $1.87 billion out of Asia ex-Japan, Latin America, Europe, Middle East, Africa, and diversified global emerging markets equity funds as of June 24th. High-yield bond and global equity funds also saw their string of consistent inflows stop, with the funds flowing into money market and U.S. bond funds. The reversal of flows has been driven in part by investor worries as to when foreign demand for manufactured goods and commodity exports will increase. Russia and Brazil equity funds, which are commodity dependent, are also posting new outflows.

As a few examples, the yearly charts for both EEM (iShares MSCI Emerging Markets Index) and the EFA (iShares MSCI EAFE Index ETF) reflect some of this indecision in the second half of June, but the trends are not unlike what has been observed in the S&P 500 Index over the same period.

Source: Bigchart.com

This slowdown in the bullish trend comes just as the International Energy Agency cut its expectations for medium-term global oil demand (see Financial Times article), with the recession diminishing the medium-term risk of a supply crunch as the spare capacity cushion remains healthy. Natural gas storage is also up (see EIA article) and above the 5-year historical range.

Yet, not everyone appear as cautious or nervous, with many analysts and traders still bullish (see SeekingAlpha articles here and here and here). In addition, as hedge funds are near completing one of their best starts of the year since 1999, many managers expected capital to continue to flow into their funds, especially those funds that are focused on emerging markets (see The Australian article). Given that many emerging market funds are commodity driven, then next few weeks/months should be telling as data on the summer driving season, housing, and currencies markets will help signal if the commodity correction has indeed arrived (see SeekingAlpha article), and whether or not emerging markets will continue their recent strength.

Just as the media and regulators continue to discuss the use of alternative investments and the active trading of hedge funds in contributing to the downfall of the economy and the stock market, many private investors are seeing each as a way to help protect themselves from recent market uncertainty (see New York Times article). While a more conservative trading mentality has been the norm for high net worth investors, many are now questioning its usefulness in the current market environment. Many investors who in the past have relied on a simple mix of stocks, bonds, and cash, and now turning to managed futures, financial futures, hedge funds, funds-of-funds, mutual hedge funds, currencies, commodities, and other avenues for gaining exposure to alternative investments.

Maybe even more interesting is how these same investors are becoming aggressive in moving away from a strict buy-and-hold approach, and instead are looking to take advantage of short-term trading opportunities - a move that indicates in part that such investors are not only opportunistic, but also worried about placing longer-term bets on the markets. As mentioned by Paul Speargas, senior client at WMS Partners:

“The buy-and-hold strategy, which was almost universally accepted by the investment and academic community over the past several decades, is no longer the sole investment strategy to be employed in order to deliver solid investment returns. A thoughtful balance between long-term investing and short-to-intermediate term trades is likely the recipe for investment success in the volatile years ahead.”

Given the interest by clients to still utilize hedge funds, commodities, futures, and alternative investments, not to mention the desire of the Fed and Treasury to have investors step-up and provide capital to purchase distressed assets, it might be good to pause and reflect before slapping or over-regulating the trading hands that are still willing to check the temperature of the investment waters.