Retail funds in Hong Kong recorded an average loss of 0.92 per cent in the second quarter due to sharp adjustments in global equity markets, according to Standard & Poor's Fund Services.
Industry experts expect the third quarter to remain subdued with the volatile political situation in the Middle East forcing up oil prices.
Sally Wong Chi-ming, an executive director of the Hong Kong Investment Funds Association, said investors would take a wait-and-see approach.
'People want to see if a high oil price affects inflation and the economy, and whether there will be any more interest rate increases,' she said.
'However, I think funds sales will maintain at a steady level as some investors may shift their money from high-yield funds to money market funds or balanced funds,' Ms Wong added.
S&P said the average return of Hong Kong-registered funds recorded a modest negative return in the second quarter compared with a positive return of 6.9 per cent in the first.
This was due to the downturn in many global stock markets, led by sharp sell-offs in emerging markets, that resulted in double-digit declines, wiping out most of the first-half gains.
Equity and real estate funds suffered most, with negative returns of 2.35 per cent and 3.25 per cent respectively, while the best-performing category was derivatives, which experienced a positive return of 3.82 per cent, followed by money market funds, which delivered an average return of 3.2 per cent.
S&P fund services director Cynthia Case said: 'As world central banks tightened, we witnessed a dramatic re-pricing of risk as market participants unloaded riskier assets on fears of both a dramatic slowdown in global gross domestic product and earnings per share growth.'
S&P expects the global economy to moderate in the second half of this year, supporting respectable low double-digit earnings gains and preventing a major acceleration in inflation.
Lorraine Tan, a director of S&P's equity research, expects interest rate-driven volatility to persist throughout much of the rest of the year, until evidence of a soft landing emerges.
'We recommend investors use the periods of weakness to position their portfolios for better equity market performance in the fourth quarter and early 2007,' she added.