Hot Money

Hot money refers to speculative capital that does not have a long-term investment orientation and which will flow quickly in and out of situations if relative investment advantages disappear or erode. Foreign capital that flows to emerging markets (which often need foreign inflows to cover current account deficits, for example) typically contains hot money. In this respect, emerging markets cannot rely on that money to remain in situ if better, higher-earning or less risky opportunities for the same return emerge.