Nov. 14 (Bloomberg) -- Emerging markets may experience about $1 trillion in investor outflows, or about a fifth of the total capital invested in the sector between 2003 and 2007, as risk appetite implodes during the worst financial crisis in decades, according to the Royal Bank of Scotland Group Plc.

The CHART OF THE DAY shows the 38 percent plunge in Morgan Stanley's Emerging Market Index and the 10 percent gain in the Dollar Index the past two months. The dollar has surged as investors sell local currencies to exit emerging-market assets since Lehman Brothers Holdings Inc. collapsed on Sept. 15.

``Given the scale of the inflows we saw over the prior five years and the current demand and desire for liquidity, safety and risk-averse related activities, $1 trillion or more may be heading quickly in the opposite direction,'' said Alan Ruskin, head of international currency strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut. ``A lot of the previous cycle is now going in reverse. It's not just raining now, there is a hurricane.''

The $1.7 trillion global hedge fund industry lost $100 billion of assets in October amid redemptions and losses, according to an estimate from Eurekahedge Pte, a Singapore-based data provider, which tracks the performance of more than 2,000 funds that invest globally.

The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries has climbed to 6.7 percentage points, compared with an average of 2.04 percentage points during the two years prior to the beginning of the collapse of the subprime mortgage market in August 2007, according to a JPMorgan Chase & Co.'s index.

-- With reporting by Tomoko Yamazaki in Tokyo. Editor: Dave Liedtka

To contact the reporter on this story: Liz Capo McCormick in New York at Emccormick7@bloomberg.net

Last Updated: November 14, 2008 12:10 EST