Press Briefing: IMF Study Concludes Hedge Funds Played Generally Limited Role in Asia Crisis

Pages155-156

Page 155

EICHENGREEN: Hedge funds are best defined as eclectic investment pools, usually with fewer than a hundred wealthy investors, constituted through private placements, typically domiciled offshore to capitalize on tax and regulatory advantages. Because they are organized as private or limited partnerships, they are free of many reporting and disclosure requirements that apply to other institutional investors. These are some of the regularities of the hedge fund industry. Probing deeper, however, one discovers a high degree of heterogeneity. Hedge funds follow a wide diversity of investment strategies; it is impossible and counterproductive, therefore, to talk about the "typical" hedge fund.

In our study, we emphasize the distinction between two broad categories of hedge funds: the "macro" funds that take large, typically unhedged positions in markets, including, but not limited to, foreign exchange markets on the basis of a top-down analysis that focuses on a country's macroeconomic and financial fundamentals; and "relative value" funds that undertake more of a bottom-up analysis-looking at particular securities or assets-and attempt to arbitrage perceived price discrepancies. Other investors-such as pension funds, mutual funds, and commercial and investment banks-engage in many of the same practices as do hedge funds. They take large positions, use leverage, transact in derivative securities, and take long and short positions in foreign exchange markets, making it difficult to distinguish between hedge funds and other institutional investors.

Data on the size of the hedge fund industry are incomplete and fragmentary. A variety of commercial data services that rely on voluntary reporting by hedge fund managers suggest that hedge funds manage about $100 billion and that they lever their capital, on average, by a factor of 4 to 7. At the end of 1997, the macro segment of the industry had about $30 billion under management. While these are large numbers, they pale compared to the pool of capital managed by institutional investors as a whole, which, for Organization for Economic Cooperation and Development countries, amounts to about $20 trillion. Concerns have been expressed that hedge funds can nonetheless play a special role in precipitating market movements-the worry is that hedge funds can act as the "lead steer" when a financial "herd" begins to move. There is some evidence that in some markets hedge funds do in fact herd...

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