Big funds involved in recent currency attack

Big funds involved in recent currency attack

KUALA LUMPUR (Reuter): Malaysian Prime Minister Mahathir Mohamad blames U.S. financier George Soros for the recent chaos in Southeast Asian currencies, but analysts say many other big funds were also involved.

Many of the 2,000-odd hedge funds in the United States "jumped on the bandwagon" when selling of Southeast Asian currencies started over two months ago, the analysts said.

Soros has denied recent involvement. He said in early August that he sold only US$10 million worth of baht in the previous two months and did not sell any other regional currency.

Apart from Soros' Quantum group of funds and the Soros Fund, the big names heard in the market are funds such as Tiger, Orbis, Puma, Panther and Jaguar, analysts said.

According to an estimate by Van Hedge Fund Advisors in the U.S., around 2,300 funds on its database control over $100 billion in assets.

"Some of these funds have never heard of Singapore, Thailand or Malaysia before, but a few used to the region must have said these currencies will yield higher returns, so they all jumped on the bandwagon," said a Singapore-based analyst.

Hedge funds are private investment partnerships with wide latitude to invest across a variety of financial markets, frequently using borrowed money and derivatives.

Rough estimates put the recent selling of Southeast Asian currencies by hedge funds alone at $10 billion to $15 billion worth.

"The fact is that the central banks of Malaysia and Thailand alone have sold nearly $8 billion to defend their currencies. So these are good estimates," the Singapore-based analyst said.

The funds started selling the Thai baht, then moved to the Philippine peso, the Malaysian ringgit, the Indonesian rupiah and finally to the Singapore dollar.

The currency selling forced Thailand and the Philippines to undertake de facto devaluations of their currencies, Indonesia widened the rupiah's trading band and Malaysia and Singapore allowed their units to slide.

Said to be inherently risky, hedge funds mostly operate from the U.S. in an extremely liberal regulatory environment.

As one dealer with a foreign exchange broker said: "They can invest in anything under the sky, there are no guidelines binding them; one day it could be commodities, the next energy, equities, derivatives or foreign exchange."

"These are people only answerable to their shareholders. Most of these guys are experienced people, who know how to deal with central banks. So when Malaysia announced restrictions, they were well prepared, well hedged," he said.

Malaysia last Sunday announced that local banks will limit their non-trade related currency swap exposure to $2.0 million with each foreign customer, effectively restricting the supply of ringgit for speculative purposes.

These funds have grown at an explosive rate in the last few years as U.S. investors, who earlier invested in mutual funds, looked for a diversified portfolio giving them higher returns under one roof, analysts said.

These funds usually promise much higher returns than other investments, which forces them to be speculative in nature.

"What the hedge funds (specializing in currencies) do is try to identify (a) mismatch between economic fundamentals and currency levels. They saw that baht was grossly overvalued, so they all piled on it until the Thai government relented," said an analyst with a European research house in Singapore.

"These funds could be acting in concert. They usually share a view on countries," said the brokerage dealer.

"It is like a roundtable. If you are in a financial center like Singapore, through which most of these hedge funds operate, you will realize along the way that all of them are linked in one way or another," the first Singapore-based analyst said.

The hedge funds usually have financial strength well beyond their means. They deposit their funds in margin accounts with banks. The banks then, depending on the fund operator's credit rating and track record, gives them access to credit which could be a multiple of between 10 and 30 times their deposits.