Demon_Roller_CoasterWe all know there’s a pot of gold at the end of the emerging market rainbow. Somewhere. But finding it has been less of a smooth arc of a rainbow and more of twisting, turning, churning, vomit-inducing roller coaster. No one ever said international investing didn’t require a strong stomach.

Over the past few decades, VCs have entered and pulled out of emerging markets over and over again, hoping they’ll finally get the timing right one of these days. Well things aren’t looking great this quarter.

Cambridge Associates is one of the few places that measures returns like these in detail, and it released its second quarter numbers today for private equity and venture capital returns in the developed world (not counting the US) and emerging markets. Both were down in the second quarter, after a pretty good first quarter showing.

A weaker Euro contributed to some of the numbers. Certainly Europe hasn’t been a picture of economic health, but as we’ve pointed out there have been challenges with the emerging market IPOs as well– particularly those coming out of the emerging market powerhouse of China.

The index for developed markets fell 1.5% — the third time in the last four quarters it has declined. Meanwhile, the index for emerging markets dropped 2.7%. Year to date, both are in positive territory but just barely– returns are in aggregate 5.9% positive for the developed world and 3.4% positive for the emerging world. The return over three years is rosier: It’s up 13.7% for developed markets and 15.5% for emerging markets. Both are in positive territory when returns are measured over a twenty year time horizon as well.

In the case of developed markets, the so-called 2006 vintage fund (meaning investors started to make their bets in 2006) was the stinker of the bunch. When it came to emerging markets each of the vintages tracked– 2005, 2006, 2007, and 2008– were all negative in the second quarter.

Although everyone talks about the need for a long-term investment horizon, limited partners in these funds were no doubt happier with their plays in the developed world in the second quarter: Capital calls are going down and distributions are up. That means, VCs and private equity players are asking for less money to invest in companies while they return more cash to their investors.

The situation is reversed when it comes to funds in the emerging world. In fact, limited partners in emerging market funds tracked by Cambridge Associates got the smallest distribution of returns in three years– an almost 40% drop from the prior quarter. Woof.

The bad news didn’t stop there. All major sectors of investment in the emerging markets index had losses, but information technology was the biggest lower– down 8.4% in the second quarter. The index is heavily weighted towards Asia: A whopping 69% of all the cash CA tracks went to the continent, with mainland China getting a good deal more than anyone else. As China goes, so go the riches of the developing world.

Some nearterm swings into negative territory are to be expected since these asset classes focus on investors with a long term view and they’re frequently funding young, risky companies that take a while to mature. And there’s some good news among the carnage: Even with the recent declines, private equity and venture capital returns in both categories are beating their public market counterparts, handily.

As we’ve written before, no matter how poorly venture capital does, that’s the most important metric that keeps cash flowing into the coffers.