Yeo Lian Sim: Hedge funds - a mainstream alternative Keynote address by Ms Yeo Lian Sim, Deputy Managing Director (Market Conduct) of the Monetary Authority of Singapore, at the Hedge Funds World Singapore 2002, Singapore, 19 September 2002. *  *  *  Good morning, Ladies and Gentlemen  A decade of controversy and rapid growth Ten years ago this month, speculation that Europe’s Exchange Rate Mechanism (ERM) would be realigned gained momentum and the British pound came under intense pressure in the foreign exchange markets. The rest, as they say, is history. Hedge funds have come a long way since the Sterling attack. They have been linked to other instances of market turmoil, like the Mexican Peso meltdown in 1994-95 and the Asian financial crisis of 1997-98. Studies have revealed little evidence that hedge funds were mainly responsible for those episodes. But their participation is not in dispute. Also in 1998, we saw the near collapse of Long Term Capital Management and its subsequent recapitalisation by a consortium of banks brought together with the help of the New York Fed. The incident raised questions about the risks that large and highly leveraged hedge funds pose to systemic stability. It was to address these concerns that the Financial Stability Forum (FSF), of which Singapore is a member, set up a working group on Highly Leveraged Institutions (HLIs).
In March 2000, the group issued a sobering reminder: institutions that provide leverage to HLIs must improve their counterparty risk management and hedge funds need to enhance their disclosures. Along with these developments, or some say in spite of them, the hedge fund industry has continued to grow from strength to strength. There are now about 6,000 hedge funds worldwide, managing more than $ billion. In 2001, some $ billion of new capital was invested into hedge funds. By 1 comparison, the entire industry was only $ billion in 1990 . While high net worth individuals remain the main source of capital, hedge funds are becoming more popular among institutional and retail investors. Funds of hedge funds and other hedge fund-linked 2 products are increasingly being marketed to the retail market . For example, ABN Amro launched the first retail fund of hedge funds in Singapore last month. There are a number of factors behind the meteoric rise in demand for hedge funds. The unprecedented bull run in the US equity markets during the 1990s swelled investment portfolios. This led both fund managers and investors to become more keenly aware of the need for diversification. Hedge funds are seen as a natural “hedge” for controlling downside risk because they employ exotic investment strategies believed to generate returns that are uncorrelated to traditional asset classes.