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.