World Economic News

Hong Kong Official: Hedge Funds Pose Threat to Asian Markets

Regulators should closely monitor hedge funds and their complex derivative products to limit systemic risk to the region, as occurred during the Asian financial crisis of 1997-98, argued Hong Kong's Chief Secretary Rafael Hui Si-yan, who is serving this week as Acting Chief Executive. "I am not sure whether there is sufficient transparency in transactions involving hedge funds to allow regulators to understand and manage the risks involved in the exposure of commercial and investment banks to these firms," Hui asserted at the annual meeting of the International Organization of Securities Commissions June 7.

Hui voiced deep concern about "the high volume and great complexity of new financial instruments for risk transfer, notably financial and credit derivative products."

Derivatives trading is "basically very opaque, posing challenges for regulators in measuring or capturing the financial system's effective exposures," he said. Regulators "should improve the quality of information for risk assessment, especially those relating to financial derivatives and hedge fund activities."

Hong Kong Securities and Futures Commission chairman Martin Wheatley also cautioned that the failure of hedge funds "could have widespread consequences for the market."

Hong Kong is home to more hedge funds than any other jurisdiction in Asia, with a total of $17 billion under management by 148 hedge funds in 2005.