(Petaling Jaya, Thursday): The Malaysian Government should respond to the latest International Monetary Fund (IMF) study that it hasn’t found compelling evidence that hedge funds take the lead in driving down currencies in the Asian financial and economic crisis.
The Malaysian Government, led by the Prime Minister, Datuk Seri Dr. Mahathir Mohamad had charged that currency speculation by hedge funds had caused economic havoc and wiped out decades of development in South East Asia and had asked the IMF to conduct a special study on the matter.
The IMF study on the role of hedge funds was summarized in the latest IMF World Economic Outlook 1998 released on Monday. It estimates that hedge fund capital (excluding "funds of funds" or hedge funds that invest only in other hedge funds) was in the neighbourhood of US$100 billion as of the third quarter of 1997. Of that, some US$25 billion was in the hands of the macro funds, which typically leverage their capital by borrowing by four to seven times.
Although these numbers are large, the hedge funds are relatively small operators compared with other institutional investors such as pension funds, mutual funds, insurance companies and commercial banks, which, in the mature markets alone, exceeds US$20 trillion. These other institutional investors are increasingly active in international markets.
The types of hedge funds that have been the target of attacks by Mahathir are the "macro funds", which bet on a certain direction they think national markets are going.
The IMF, however, found that macro funds aren’t the only ones playing that game. Multinational firms also routinely take positions in these markets to protect their large reserves of capital, so what the hedge funds do isn’t all that extraordinary except for their more relentless pursuit of profits, IMF officials say.
The IMF study concludes:
"The most important action policymakers can take to protect their economies against uncomfortable market movements is to avoid offering one-way bets in the form of inconsistent policies and insupportable currency pegs. They can also strengthen the ability of clearance, settlement, and payments systems to withstand asset-price volatility. And they can provide better information about government policy and private sector financial conditions in order to weaken the tendency for inadequately informed investors to ‘follow the herd’ and thereby magnify the repercussions of the positions taken by large institutional investors, among which hedge funds are only one category."
(16/4/98)