Hedge funds come under scrutiny at ADB meeting

Hedge funds come under scrutiny at ADB meeting

MANILA (AFP): The role of hedge funds sparked strong debate at
a key meeting of the Asian Development Bank Saturday amid signs
private capital was returning to crisis-hit Asia.

Japanese Finance Minister Kiichi Miyazawa said the recession-
hit region should be wary of short-term, speculative funds as the
region recovered from financial turmoil caused by rapid currency
declines.

Recalling the regional currency crisis sparked by the de facto
devaluation of the Thai baht in mid-1997, Miyazawa said many
developed nations now believed the crisis was caused by hedge
funds.

The finance ministers of China and Malaysia as well as a top
French Treasury official joined Miyazawa in calling for caution
over the role of speculative funds in the region.

But a United States government official said Washington was
"skeptical" about claims that hedge funds were the primary cause
of the regional currency crisis.

Some analysts have described funds flooding the current
booming stock markets in the region as "hot money" or speculative
funds and reminiscent of the money inflows that preceded the
currency crisis.

U.S. Assistant Treasury Secretary Edwin Truman meanwhile told
the ADB meeting that the crisis was caused by "macroeconomic
imbalances."

Hedge funds have a wide investment portfolio spanning
government securities, financial futures and options.

Because the funds are small private investment partnerships
for the very rich they do not need to disclose as much
information as other financial institutions.

The raging debate on the role of hedge funds, also blamed for
financial crises in Latin America and Russia, came as an
international group of financial institutions said net private
capital flows to emerging markets would hit US$140 billion this
year.

China was expected to grab the bulk of funds headed for the
Asia-Pacific region forecast at $28.7 billion this year from $7.8
billion last year, according to the Institute of International
Finance (IIF).

The Washington-based IIF chairman, John Bond, said at the
sidelines of the ADB talks that equity inflows would make up the
bulk of the capital inflows this year.

Miyazawa said Asia should check the movement of hedge funds to
avoid past mistakes.

He said that at a recent International Monetary Fund (IMF)
meeting in Washington "IMF countries mostly coming from Europe as
well as the U.S. feel that the hedge funds have to do much with
the occurrence" of the currency crisis in Southeast Asia.

Asia's crisis-hit economies needed "long-term related funds
and investment" and "they all recognize that speculation is
something we would not like to have back," Miyazawa said.

Chinese Finance Minister Xiang Huaicheng said there was a need
to "closely monitor excessive speculation in international
capital markets."

"To open financial markets, it is necessary to be prudent and
well prepared on the basis of the country's specific (factors)
rather than aiming to accomplish the whole task at one stroke,"
Xiang said.

Philippe de Fontaine Vive, deputy director in the French
Treasury, spoke of the need for "reinforcement of mechanisms of
surveillance of capital flows" and "prudential control especially
on hedge funds and for transparency, including financial offshore
centers."

Malaysian Second Finance Minister Mustapa Mohamed sought
support at the ADB meeting for reforms in the global financial
system, especially ways to monitor capital flows.

"We cannot afford another crisis," he said.

Mustapa said there was a need to improve transparency of hedge
funds and other financial market participants through additional
regulatory and disclosure measures.