The recent volatility and pullback in Asian markets have prompted some investors to sound a familiar refrain: It’s all the fault of the hedge funds. In the last two years, dozens of these funds have set up shop in Asia hoping to find relatively hidden lucrative opportunities, as markets in Europe and the US become more crowded and competitive. Their trading in equity markets has grown sharply: they were responsible for 22 per cent of the brokerage commissions paid on Asian cash equity trades in 2006, up from 5 per cent in 2004, according to Greenwich Associates. Many small traders and brokers in the region argue that the growing influence of hedge funds in Asia has exaggerated market movements, particularly the declines that rocked global markets recently. They also say the funds contribute to higher volatility in the Asian equity markets. Hedge funds are going to create even more unpredictable gyrations in the future, making things still more difficult for other investors, they say. Regulators are keeping a close eye on these funds. Market regulators from Britain and Hong Kong are meeting Indian regulators in Mumbai in April to discuss hedge fund participation in markets. It is the first time India has been host of such a roundtable. A fifteenfold increase in market capitalisation on Vietnam’s stock market recently ignited fears among regional market analysts that Vietnamese regulators would impose capital controls to start shutting out foreign investors. Aggressive hedge fund managers normally take positions intended to profit from a market decline if they anticipate one. Many say that the correction in late February was widely expected. In December, fund managers in Asia say they had begun warning of an imminent slide in markets. What is surprising about the February drop, though, analysts said, was how few hedge fund managers appeared to have actually profited from the market declines. Instead, they seemed to have been trying to take advantage of the bull market for Asian stocks and bonds by buying aggressively. Referring to the sell-off that began in late February, Henry To, investment adviser at MarketThoughts, said, “At the height of the selling, money managers in Asia were remarking that they have not experienced this kind of selling intensity since the height of the Asia Crisis” in 1997 and 1998. A focus on hedge funds does not tell the whole story, though, emerging market veterans say. “The ferocity to which the market decline in China spilled over to the global markets is to some extent attributable to hedge funds,” said Marc Faber, an investment adviser, nicknamed Dr Doom for his bearish sentiments. “But today, it is not just the hedge funds that act like hedge funds — it is also the proprietary desks of banks like Goldman Sachs”.-HEATHER TIMMONS
