11:03 30 Jun 2002 RTRS-INTERVIEW

By Nick Edwards

Asia Eyes Hedge Fund Harmony After Crisis Chaos

HONG KONG, June 30 (Reuters) - Blasted as havoc-wreaking by Hong Kong and profiteers of misery by Malaysia during Asia's financial crisis, five years later hedge funds are more often courted in the region than shunned.

"Back in '97 the general concept of hedge funds was that of these evil managers trying to wreck currencies and economies," John Hetherington, a consultant with Eureka Hedge Advisors in Hong Kong, told Reuters.

"I suspect five years from now hedge funds will be regarded as just another asset class you buy like any other," he said.

Money invested in hedged strategies in the Asia Pacific region outside of Japan jumped 33 percent in 2001 to US$16 billion, according to the Bank of Bermuda. Another US$2-US$5 billion could be raised in Asia in 2002, industry sources say.

Demand for hedge funds in Asia now outstrips the industry's ability to deliver, with too few managers available to invest the money flooding into the sector, sources say.

Shrouded in mystique and based in lightly regulated offshore havens, Asian hedge funds owe much of their change in fortune to the global bear market that has prevailed in the past two years.

Their alternative strategies dazzle with 10-year returns that beat traditional equities by an average of at least 20 percent with only half the volatility, combined with the ability to make profits while stocks sink elsewhere.

Hedge funds can now sell direct to Hong Kong retail investors - one of the few places in the world to permit it.

This breakthrough comes just four years after they were blamed for sparking 1998's US$15 billion government bailout of the stock market and lambasted for "creating havoc in market places" by Hong Kong leader, Tung Chee-hwa.


Arthur Yama, managing director of Hong Kong-based alternative investment house Aquitaine Investment Advisers, said the recent regulatory shift was progress, but not a sea-change.

"By authorising retail investment (Hong Kong) certainly signals that the fear or aversion of the past is not as strong as it used to be," he said. "But will the rest of Southeast Asia follow suit in the near future? I don't think so."

Hong Kong's government was hardly glowing when asked to describe its present position on hedge funds.

"We welcome the introduction of new financial products to broaden and deepen our market, to meet users' needs and enhance our competitiveness as an international financial centre without compromising investor protection or systemic stability," a spokesman told Reuters.

Such risks to systemic stability around the region have been held in check in part by the continued enforcement of rules which in many Asian markets make short selling, a key strategy of hedge funds, illegal, or at least exceedingly expensive and difficult.

Risks have also arguably declined with the fall from favour of the global macro investment style -- taking big bets against currencies - like that used by George Soros, the hedge fund legend labelled a "moron" in 1997 by vocal critic Malaysian Prime Minister Mahathir Mohamad.

Mahathir squarely blamed Soros and the industry he helped shape for the region's woes and at the height of the crisis said the financier was "profiting from the misery of other people".

But huge improvements in bank regulation, foreign reserve levels and exchange rate regimes pursued by Asian economies in the wake of the crisis are doubtless the biggest factors reducing the region's systemic risks.

Hedge fund managers see the changes as an admission that poor policy combining too rapid liberalisation of currency markets, high domestic interest rates, soaring foreign debt and fixed exchange rates was ultimately to blame for the crisis.

"It was central bank policy that was absolutely disastrous and could not lead to anything else but what happened," Richard Werner, chief investment adviser at Tokyo-based hedge fund, ProfitFundCom, said.

"It shows how much we underestimate central bank risk," said Werner, who was a senior consultant to the Asian Development Bank's 1998 crisis response project in Thailand.

Thailand sparked the wave of Asian devaluations and market crashes in 1997 and 1998 after the baht collapsed in July 1997.

The financial and social costs of the crisis were huge.

South Korea has spent US$130 billion in public money to recapitalise its broken banking system while Indonesia, the nation hardest hit by the crisis, is still years away from getting the living standards of its poverty-stricken 210 million population back to pre-crisis levels.

"Most people, perhaps even Mahathir himself, would agree that while initially it looked like it was the hedge funds, they were merely what triggered it and if it hadn't been them, something else would have triggered it," Werner said.

Officials at Malaysia's central Bank Negara were not immediately available for comment on the subject.

Nick Edwards
Chief Investment Correspondent, Asia
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