The Dynamics of Emerging Markets Hedge Funds Exposures during the Asian Currency Crisis of 1997

Abstract

During the last decade, hedge funds attracted the attention of the financial community for two major reasons: their capacity to generate superior performance, and their lack of transparency. However, since the market events of the 1990s, they are frequently associated with managers such as George Soros, who is well known to have taken considerable advantage of the European currency devaluations in 1992. Following the Asian currency crisis of 1997, the good reputation of hedge funds has been greatly damaged. They were suspected of having been an active contribution to the trigger of the speculative attacks that led to the Ringgit and Baht devaluations. Academics then assumed that hedge funds might be capable of disrupting financial markets through an intensive use of leverage and derivatives. This atmosphere of suspicion was reinforced by the collapse of long term capital management in 1998. Once more, an isolated event attracted regulators’ attention.