Issues Raised in Parliament

ANSWER TO PARLIAMENTARY QUESTION ON:
Hedge Funds

For Parliament Sitting on 20 Jan 1999

Question:
To ask the Deputy Prime Minister if he will state the Government's policy on hedge funds.

Answer:
Hedge funds are typically private investment partnerships that are marketed to a limited clientele of high net worth investors. There are many types of hedge funds. Some take large and unhedged market positions, betting on movements of exchange rates, interest rates, and market trends. Others use defensive and hedged strategies to protect themselves against adverse market movements. Some borrow heavily from banks, to become highly leveraged funds. However, the majority of hedge funds are only lightly geared, and trade mainly using their own capital ¹.

2 The risks which highly leveraged hedge funds can pose to financial systems are well-publicised. Such hedge funds can rapidly build up large market positions, using money borrowed from other institutions. When their aggressive one-way bets go wrong, the unwinding of these accumulated positions can threaten to destabilise the whole financial system. The recent debacle of Long Term Capital Management was a vivid example.

3 However, these risks are not specific to hedge funds. Banks and other financial institutions, especially proprietary trading desks of banks, often engage in similar leveraged strategies as hedge funds.

4 There is some risk that speculation by hedge funds can impair the ability of governments to manage exchange rates and conduct monetary policies. However, this risk exists regardless of whether hedge funds base their fund managers in Singapore, Hong Kong or anywhere else. Decisions to take large aggressive bets are made by their head offices, and do not depend on where their fund managers are located.

5 While hedge funds have been blamed for causing the Asian financial crisis, an IMF study in December 1997 found that their role in the Asian financial crisis has been greatly exaggerated, and that the underlying causes were basic weaknesses in the banking and corporate sectors.

6 A world class financial centre is characterised by a wide range of investors, interme-diaries and financial instruments. It has active markets and efficient exchanges. The presence of diverse investors stimulates the development of a broad range of financial instruments. Established financial centres like New York, London and Hong Kong are already hosts to such a wide spectrum of investors, including hedge funds. This has fostered the use of innovative investment techniques in these centres.

7 MAS therefore has no blanket policy either to ban or to attract hedge funds. Hedge funds wishing to operate in Singapore are subject to the same regulations and licensing criteria as any other funds and fund management companies.

8 MAS' supervisory approach is to ensure that financial institutions are not over-exposed to any particular counter-party or type of asset. MAS will continue to emphasise financial institutions' reporting of large trades and positions as well as compliance with prudential exposure limits. MAS uses these supervisory tools to monitor and manage systemic risk in our markets and exchanges, and to restrain financial institutions from becoming excessively exposed to any particular counter-party, including hedge funds.

9 Regulators in developed countries are actively studying the issue of how to improve disclosure and reporting requirements for hedge funds and other market participants. Given Singapore's position as a major financial centre, MAS has an interest in higher disclosure standards and is participating in such studies. MAS will ensure that our own disclosure and reporting requirements meet international best practice.

¹ Studies done by Van Hedge Fund Advisors International, a US company specializing in hedge fund research, have confirmed this.

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