ASEAN business opportunities

The U.S. dollar has entered the appreciation channel since 2014, while the Thai baht, Malaysian ringgit, Indonesian rupiah, South Korean won, Russian ruble and other emerging market currencies have depreciated along with the yen and the euro. Against the background of weak global economic recovery in 2015, continued decline in trade volume and commodity prices, interest rate hikes by the Federal Reserve, and devaluation of the renminbi, global stock markets have fallen sharply since 2016.

    Recently, the media has been hyping the topic of the recurrence of the 1997-1998 Asian financial crisis, and the linked exchange rate system between the Hong Kong dollar and the US dollar has also been questioned again after many years. At this sensitive time, George Soros, who was nearly 86 years old, made a high-profile voice, indicating that he would be long US debt and short US stocks and Asian currencies. Criticisms against him and other short-sellers continue to emerge. Against this background, the title of this article seems to be superfluous. The image of Soros's "dark warrior" who is making a fortune has become clear and nailed. However, in the article "Finding the Tipping Point of the Financial Crisis", I unearthed the triggering turning points and tipping points of several crises, and pointed out that the view that hedge funds played a leading and destructive role in the crisis was not convincing enough.

    In fact, defending short positions in the capital market is a thankless thing. Most of the previous articles talked about the behavior of short positions from a theoretical point of view to promote the return of overvalued asset prices to value, which is conducive to resource allocation and market efficiency. From another perspective, this article puts hedge funds in the context of the entire market to see their influence in the crisis.

    Few people may know that Soros's first short-selling currency was the U.S. dollar. Before his main investment targets were stocks and bonds, he relied on his own "reflection theory". The core is that the value of assets is difficult to determine, but will be "inversely" affected by transaction prices (traditional theory believes that prices are determined by value). If the price is unreasonably raised, it will mislead others to believe that the value is increased. This will produce a "positive feedback" spiral between "price-value" and form an asset bubble, but it will eventually burst.

    Beginning in 1984, Soros discovered that while the US trade deficit was expanding in the 1980s, the U.S. dollar did not depreciate as predicted by traditional theories. Instead, it continued to appreciate due to the influx of speculative funds. He believed that the dollar would eventually depreciate, so he began to wait. His good habit of writing an investment analysis diary helped him set his bet time on August 16, 1985. His Quantum Fund bought a total of US$760 million in Japanese Yen, Deutsche Mark and British Pound. Three weeks later, the U.S. dollar continued to appreciate, and the fund lost 20 million U.S. dollars. On September 22, the United States, Britain, Germany, France and Japan reached the "Plaza Agreement". The core is to coordinate actions to promote the devaluation of the US dollar to resolve the US's persistent high trade deficit. Soros then continued to increase positions in the yen and the mark and began to short the dollar directly. Four months later, the fund's net value rose by 35%, with a profit of 230 million U.S. dollars, while the annual net return was close to 120%, setting a record for a quantum fund. Soros attributed the credit to the diary, which was published two years later under the title of "Financial Alchemy", by which time the U.S. dollar had depreciated by about 40%.

    Another successful transaction that Soros has been familiar with in recent years is the implementation of quantitative easing in Japan. His family office made a profit of US$1 billion by shorting the yen from the end of 2012 to the beginning of 2013. At the same time, it also made long Japanese stocks. This long-short transaction continued in the subsequent period (plus other investments, which resulted in a profit of $5.5 billion in 2013). But this time, like shorting the US dollar in the 1980s, there was no criticism of Soros. Perhaps everyone thinks that this is a currency devaluation actively promoted by the government, and he is just taking advantage of the trend. If the hedge fund can accelerate the realization of the government's correct goal, it can be called a "white warrior."

    On September 16, 1992, known as "Black Wednesday" in history, the Bank of England had to depreciate in the face of short-selling the British pound by macro hedge funds and other institutional investors without sufficient foreign exchange reserves to defend. This has also made Soros a well-known "hero" or "demon" in Europe and the United States as "the man who broke the Bank of England". The European exchange rate system stipulates that each member country has the responsibility to stabilize the fluctuations of their currency exchange rates within a certain range. After the reunification of the two Germanys, Germany raised interest rates to ease inflationary pressures, which put a lot of pressure on countries including the United Kingdom, Italy, Spain, Portugal and other countries that implemented low interest rates to stimulate economic growth. The pound and lira depreciated against the German mark, gradually approaching the lower limit set by the European exchange rate system. On the morning of September 16, the British government decided to raise interest rates from 10% to 15%, but it was unable to ease the decline of the pound. That night, Britain decided to withdraw from the European exchange rate system, followed by Italy and Spain to let their currencies float freely. Earlier, Soros used the "straight-forward arteries" to order the specific trader Zhukenmiller to upgrade the short pound and Italian lira positions from 1.5 billion U.S. dollars plus leverage to 10 billion U.S. dollars, and finally made a profit of about 1 billion U.S. dollars ( At that time, the annual foreign exchange trading profits of major American banks were usually 300 million U.S. dollars). Next, the currencies of Ireland, Spain and Portugal depreciated one after another. During this period, the Quantum Fund made a profit of 1 billion U.S. dollars by shorting the Swedish Krona in November 1992, and the total profit from the devaluation of other currencies was close to 1 billion U.S. dollars. However, the nearly 2 billion U.S. dollars in profit was not noticed by the media and little known. In 1993 In August, the European exchange rate system officially ended.

    The International Monetary Fund (IMF) organized experts to investigate the incident in 1993 and found that the one-way capital flow from participation in investment/speculation to the narrowing of the European currency volatility was as high as 300 billion US dollars. Once the exchange rate system is found to be unsustainable, it will be reversed. Transfer transactions. The Bank for International Settlements found that before the crisis started in early 1992, the daily trading volume of the pound sterling reached 62 billion US dollars. In 1992, nine major macro hedge funds including Quantum Funds (defined as "large" by managing more than US$1 billion, and the funds held by large funds can account for 80-90% of the entire industry) had a total capital scale of 158 100 million US dollars, the short position of the British pound reached 11.7 billion U.S. dollars. Compared with the total capital and daily transaction volume of other investment banks, commercial banks, and multinational companies involved in selling the British pound, the short position of macro hedge funds is not large. (However, relative to the UK's US$40 billion in foreign exchange reserves, hedge fund positions appear to be quite large). In addition, large hedge funds that adopted trending strategies lost money in September. After adding some more detailed data analysis, experts concluded that hedge funds did not participate in the initial reversal of the pound crisis, and even without hedge funds, the depreciation of the pound sterling cannot be avoided.

    Criticizing Soros appeared in 1992 and reached its peak after the East Asian financial crisis broke out in 1997. Since July 1997, the Thai baht, Malaysian ringgit, Philippine peso, Indonesian rupiah, and Korean won have depreciated sharply. The stock market of most Asian countries has plummeted, triggering economic recession, corporate bankruptcy, bank failure, real estate devaluation, rising unemployment, and social Unrest and political instability. "Business Week" reported in August of that year that several macro hedge funds made huge profits when the Thai baht depreciated 23% in July. For example, Quantum Fund made 11.4% in one month. In an interview with The Wall Street Journal in September, Zhukenmiller admitted to be shorting the Thai baht and Malaysian ringgit. For a time, Soros and his colleagues became the "public enemy" in Asia and the target of verbal criticism from the media. Malaysian Prime Minister Mahathir has publicly called Soros "robbers of the global economy". He said that "Our countries have spent more than 40 years building the economy, but Soros this group of idiots has destroyed everything" and suggested that there will be no Trade-backed currency transactions are classified as illegal (do these words sound familiar?).

    Soros retorted without showing weakness, "Mahathir's accusation against me is wrong. He is looking for a scapegoat to cover up his own economic mistakes... He is the biggest threat to the Malaysian economy." In particular, Soros mentioned that he did not sell the ringgit until two months before the crisis began, and had been buying it before. It is very interesting that Mahathir and Soros met in 2006. This time he said that he no longer believed that Soros should be responsible for the Asian financial crisis.

    Why is there such a change? The correlation between the Quantum Fund and the S&P 500 index is as high as 0.64, while the correlation with the Thai baht exchange rate is only 0.16. In other words, the quantum fund's 11.4% return in July came largely from US stock trading, and the S&P index rose 8% that month. Soros’s 1998 book "Global Capitalism Crisis" pointed out that Quantum Fund sold the forward contract of Thai baht and ringgit in early 1997. After the outbreak in July, it did not sell short but switched to buying because Worried that Mahathir will implement capital controls (actually implemented only one year later).

    In July, when the Thai baht depreciated 23%, the net positions of the 12 large hedge funds were positive. In the ensuing time, the short positions of these funds in Asian currencies are not high. A large part of the funds for the long rupiah in November-December came from Quantum Fund, because Soros believed that the rupiah had been excessively depreciated and bought it. Unexpectedly, the IMF's rescue plan encountered the obstruction of the Indonesian government. Fell 44%. Soros lost 800 million U.S. dollars, more than the 700 million U.S. dollars he had gained by shorting the Thai baht and the ringgit. In addition, the depreciation of the Korean won only began in November, but hedge funds had no obvious positions at that time. Research by Korean scholars found that foreign investors did not play a destructive role during the devaluation of the Korean won. On the contrary, South Korean retail investors should bear the main responsibility. Soros did not participate in shorting the Korean won. He was warmly welcomed by President Kim Dae-jung during his visit to South Korea in January 1998. After criticizing the IMF's rescue plan, Soros provided his solution and said that if it can be done, the Quantum Fund is willing Investing in South Korea will also attract other foreign capital. In the next ten days, the South Korean stock market rose 25%.

    Even if the short position in June reached more than 5 billion US dollars, it can be seen from two aspects that the scale is not large. First of all, the total assets of these 12 funds at the end of 1997 were approximately US$34 billion. Even if the short positions that began in June were accumulated, they were far lower than the total assets. Secondly, and more importantly, Figure 5 clearly shows that funds were attracted by the "East Asian economic miracle" before the crisis and continued to flow in, but in 1997 large outflows from five hard-hit countries. Compared with the flow of funds of investment banks, commercial banks, multinational companies, traditional funds and other institutions, hedge funds are almost negligible.

    In the article "Finding the Tipping Point of the Financial Crisis," I have stated that the turning point of the East Asian economy came from the depreciation of the Renminbi and Japanese Yen in the mid-1990s, which led to the decline in exports from East Asian countries, and the rise in US interest rates that led to the strengthening of the US dollar. When the current account deficits of some countries occurred, many large banks in South Korea closed down, and the hot money that flowed into the East Asian economy and invested/speculated in real estate and infrastructure began to flow out and triggered a debt crisis. Most currencies of East Asian countries have implemented a fixed exchange rate system linked to the U.S. dollar and are beginning to bear pressure. The Thai baht was the first to be sold in May 1997. The tipping point was that Japanese commercial banks withdrew their loans from Thailand. It turned out that Japanese commercial banks, which were trapped in the bursting of the domestic real estate bubble, first lent loans to Asian countries such as Thailand (carry spreads), but later withdrew from Thailand in order to respond to the capital adequacy requirements of the Bank for International Settlements to be implemented in 1998 ( Half of Thailand's capital inflows from abroad came from Japan), which directly prompted other investment institutions to follow suit. Hedge funds are not the leaders in the crisis, but they are behind these large institutions, and their development process is almost the same as that of the European exchange rate crisis in 1992. Even if hedge funds are the last straw to crush the camel, then this straw needs to bear no more responsibility than other straws.

    The above-mentioned opinions and data mainly come from the research of two outstanding Chinese scholars William Fung and David Hsieh. Prior to them, IMF researchers and Yale University professors have come to similar conclusions. Figure 6 shows that the positions of the top ten currency funds in the Asian currency basket were not unusual in 1997 compared with previous years, and the correlation with exchange rate changes was very low. Fung and Hsieh also studied the October 1987 U.S. stock market crash, the volatility of the global bond market from 1993 to 1994, and the 1994 Mexican peso crisis. They also found no evidence of significant damage from hedge funds. As for the Internet technology bubble in 2000, the Quantum Fund was reorganized due to losses, and Julian Robertson, the founder of the Tiger Fund, who had worked alongside Soros for many years, closed the fund due to losses and divestments.

    However, these academic studies have a very small spread after all, and the view that short sellers are black warriors is still widespread. Jim Chanos, nicknamed "The Biggest Bear on Wall Street," is known for short selling stocks that are overvalued. At the end of 2000, he studied the energy company Ann, then began to short its stock at a high of $90, and has been calling for other investors to follow up. Prior to this, Enron was rated as the most innovative company in the United States for six consecutive years. Chanos' behavior was considered "anti-American." People searched the bible for improper short-selling statements to condemn him. Chanos remained unmoved and continued to increase short-selling. It was not until the end of 2001 that Enron's accounting forgery scandal was exposed, and when the stock fell to 6 cents and declared bankruptcy, everyone discovered that Chanos was actually the white warrior of the stock market.

    Similarly, after the outbreak of the financial crisis in 2007-2009, several hedge funds (including the Soros Fund) that made huge profits by shorting real estate-linked mortgage bonds and their derivatives were not accused by the media as the culprits. Not long after the incident, I believe everyone can still remember the beginning and spread of the crisis. Although the recently released movie "Big Short" (Hong Kong translation of "Betting and Throwing") puts the protagonist on a few hedge fund managers who make short profits, I believe that at the end of the film, there are very few viewers who think they are responsible for the crisis.

    Over the years, researchers and government officials have listed a series of responsible persons and policy errors that led to the great crisis, but hedge funds are not among them. The US House of Representatives Supervision and Government Reform Committee held a hearing on the impact of hedge funds in the financial crisis on November 13, 2008. The meeting convened five fund managers: Soros, Jim Simmons, John Paulson, Philip Falconi, Kenneth Griffin. They have both profits and losses in the crisis. The unanimous view is that both government regulators and traditional financial institutions need to be responsible for the crisis. For example, Simmons believes that bond rating agencies sell pig ears as silk bags as the person who is most responsible for the crisis. They also agreed that the supervision of financial institutions should be appropriately strengthened and the transparency of the hedge fund industry should be enhanced.

    Interestingly, at the hearing, Soros issued criticisms and warnings on the hedge fund industry. He believed that the leverage used by hedge funds was too high and the scale of asset management would fall by 75% in the next few years. However, these two points are not entirely accurate. The leverage of individual strategies (fixed income arbitrage) in the hedge fund industry is as high as 10-30 times, but the industry average leverage is only 2-3 times. The average leverage of traditional commercial banks, investment banks and the financial industry is usually 10-40 times (see Figure 7).

). As for the second point, the forecast is even more pessimistic. The scale of assets managed by the hedge fund industry has continued to grow from US$1.4 trillion in 2008 to close to US$3 trillion at present.

    Before this hearing, the committee had received expert reports from several professors. Although there is a view that the expansion of the hedge fund industry has increased systemic risks, in terms of scale, they are far less harmful than traditional financial institutions. In particular, hedge funds are not the source of the crisis. They have not promoted the expansion of real estate mortgage bonds and derivatives markets, have not given high ratings to problem bonds, and have not borrowed short-term loans and long-term loans like traditional banks and shadow banks. As of September 2008 Of the $760 billion in assets of global financial institutions, only 7.8% came from hedge funds and non-bank institutions. The most important thing is that hedge funds never ask the government to compensate with taxpayers' money after they lose money.

    Since 2016, funds that have encountered resistance to shorting the renminbi have shifted their focus to Hong Kong's foreign exchange and stock markets. At present, compared with all kinds of media hype, the Hong Kong Monetary Authority's response method is more mature and calm. Since hedge funds are under less supervision and insufficient information disclosure, it is not easy to comprehensively comment and judge. Hedge fund research has only gradually gained attention in the financial academia since 2005.

    The purpose of this article is not to defend hedge funds. If Soros are the dark warriors of the financial crisis, then the destructive role played by other institutions should not be ignored. It is normal to have different views on this. For example, Paul Kerman, who wrote "The Myth of the East Asian Miracle" in 1994 and is widely regarded as predicting the East Asian financial crisis, believes that Soros should be responsible for the crisis. . I recommend interested readers to read the book "More Money Than God" which introduces macro hedge funds in detail or the book by Soros himself. Soros has stated many times that he would rather be a philosopher than a financier, and a reminder of distorted economic policies, rather than make money by making use of policy mistakes.