GOVERNMENT'S POLICY ON HEDGE FUNDS

The following Question stood in the name of Mr Shriniwas Rai -

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

Mdm Claire Chiang See Ngoh (Nominated Member): Question No. 8, Sir.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, 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.

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.

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

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 the hedge fund managers are located.

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 had been greatly exaggerated, and that the underlying causes were basic weaknesses in the banking and corporate sectors.

A world class financial centre is characterised by a wide range of investors, intermediaries 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.

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.

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.

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.

Mr Low Thia Khiang: Sir, I would like to ask the Deputy Prime Minister whether our financial institutions and financial regulatory system in Singapore are strong enough to manage the hedge funds, especially now that we welcome the presence of hedge funds in Singapore.

BG Lee Hsien Loong: Mr Speaker, Sir, we are always watching carefully developments and tracking whether we need to make adjustments to our supervision and regulation policies. As I explained earlier, the point is not whether or not we welcome the hedge funds to Singapore, because even if we do not welcome them here, they can operate in the Singapore market from overseas. They make their decisions at headquarters which may be in New York or London. The entities are probably domiciled in Cayman Islands or Bahamas or some tax havens like that, and they operate around the world using agents, other banks, sometimes present in person to track what is going on. So the key point is not whether or not they are present here with an office, with a nameplate, but whether or not they are operating in the Singapore market, perhaps from afar. And we have seen evidence that our exchange rate movement has been partly affected by hedge funds which have been taking positions, as they do in all Asian currencies. So it is a position which we have to watch all the time.

Mr Low Thia Khiang: Sir, my question is: what is the assessment of the Deputy Prime Minister on whether our financial institutions and systems are strong enough to manage the risks that may arise because of hedge fund speculation?

BG Lee Hsien Loong: Mr Speaker, Sir, we believe that we have good institutions but we are never satisfied, and I would not tempt fate to say that we are totally impregnable. You never know what developments can occur. We have to make sure that when they do, we are ready for them.