Hedge funds' role in slide discounted

April 14, 1994|By Joel Obermayer | Joel Obermayer,Sun Staff Writer

WASHINGTON -- Billionaire fund manager George Soros and federal regulators yesterday downplayed the role sophisticated investment techniques used by hedge funds played in the recent stock market slide.

"Frankly, I don't think hedge funds are a matter of concern to you or the regulators," Mr. Soros told the House Banking Committee, which held a hearing on hedge funds. The 63-year-old Hungarian financier manages the $10 billion Quantum Fund, a group of hedge funds.

"I must reject any assertion or implication that our activities are harmful or destabilizing," he said.

Hedge funds are large pools of money put up by wealthy investors that often try risky investment strategies. Typically, they will borrow funds to increase the size of the bets they can make on broad market trends, interest rates, currencies and the like.

Mr. Soros has acknowledged that he has been among those who lost money in the recent market turmoil. During just one day in February, he lost $600 million betting the Japanese yen would rise -- although that loss is a pittance compared with the

huge profits his investments have turned. In the fall of 1992 for example, he took in more than $1 billion, profiting from the fall of the British pound.

Still, lawmakers and regulators are concerned over the lack of information they have about these largely unregulated funds.

"Even the largest hedge funds are small relative to the broader markets in which they operate," said John P. LaWare, a member of the board of governors of the Federal Reserve System. The funds pose little risk to the nation's banking system, he added.

Securities and Exchange Commission Chairman Arthur Levitt said the market slide was more likely caused by economic and political factors rather than hedge funds. "Hedge funds may have nudged the process a bit, though," he said.

Still, Mr. Levitt said he was concerned that there is not enough disclosure and information available about hedge fund activities, either to regulators or the general public.

"The trading of a handful of very large, aggressive hedge funds has become a matter of legitimate national inquiry and importance," he said.

Hedge funds are estimated to have about $80 billion in capital, but by borrowing large amounts they can have an effect equivalent to 10 times their size. Such borrowing makes them extremely risky.

For example, Askin Capital Management, a small hedge fund group in New York, lost nearly all of the $600 million it had under management in just two months this year and had to shut down.

Mr. Soros pointed his finger at big institutional investors like mutual funds in looking for causes for market volatility. And he warned of the potential danger to markets caused by securities called derivatives.

He said the growth in mutual funds encourages managers to act en masse in a "trend-following" manner, which tends to exacerbate market declines.

"The key question you need to ask then is what generates trend-following behavior. Hedge funds may be a factor and you are justified in looking at them, although as far as my hedge funds are concerned you are looking in the wrong place," he said.

Increasing use of derivatives has also destabilized the stock and bond markets, he maintained. Derivatives are financial instruments whose value is linked to interest rates, stock prices, currency rates or commodity prices.

"There are so many of them, and some of them are so esoteric, that the risks involved may not be properly understood even by the most sophisticated of investors," Mr. Soros said.

While all regulators present agreed that there should be more disclosure of hedge fund activities, none advocated strong regulation at this time.

Mr. Levitt said he was trying to set up voluntary meetings with hedge fund managers to learn more about their positions and trading strategies. "There is a compelling need to learn more," he said.

Even Mr. Soros agreed that more disclosure, provided it did not interfere with his trading activities, was probably a good thing. Regulations, however, ought not to single out hedge funds, he said.

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