yeo lian sim : hedge funds - a mainstream alternative keynote address by ms yeo lian sim, deputy managing director ( market conduct ) of the monetary authority of singapore, at the hedge funds world singapore 2002, singapore, 19 september 2002. * * * good morning, ladies and gentlemen a decade of controversy and rapid growth ten years ago this month, speculation that europe ’ s exchange rate mechanism ( erm ) would be realigned gained momentum and the british pound came under intense pressure in the foreign exchange markets. the rest, as they say, is history. hedge funds have come a long way since the sterling attack. they have been linked to other instances of market turmoil, like the mexican peso meltdown in 1994 - 95 and the asian financial crisis of 1997 - 98. studies have revealed little evidence that hedge funds were mainly responsible for those episodes. but their participation is not in dispute. also in 1998, we saw the near collapse of long term capital management and its subsequent recapitalisation by a consortium of banks brought together with the help of the new york fed. the incident raised questions about the risks that large and highly leveraged hedge funds pose to systemic stability. it was to address these concerns that the financial stability forum ( fsf ), of which singapore is a member, set up a working group on highly leveraged institutions ( hlis ). in march 2000, the group issued a sobering reminder : institutions that provide leverage to hlis must improve their counterparty risk management and hedge funds need to enhance their disclosures. along with these developments, or some say in spite of them, the hedge fund industry has continued to grow from strength to strength. there are now about 6, 000 hedge funds worldwide, managing more than us $ 550 billion. in 2001, some us $ 140 billion of new capital was invested into hedge funds. by comparison, the entire industry was only us $ 20 billion in 1990. while high net worth individuals remain the main source of capital, hedge funds are becoming more popular among institutional and retail investors. funds of hedge funds and other hedge fund - linked products are increasingly being marketed to the retail market. for example, abn amro launched the first retail fund of hedge funds in singapore last month. there are a number of factors behind the meteoric rise in demand for hedge funds. the unprecedented bull run in the us equity markets during the 1990s swelled investment portfolios. this led both fund managers and investors to become more keenly

sell government securities to affect liquidity and attain their interest rate targets. mas buys and sells foreign currency against the singapore dollar to keep the s $ neer within its policy band. just as other central banks ’ monetary policy operations cannot be construed as interest rate manipulation, mas ’ foreign exchange operations cannot be described as currency manipulation. 7 / 11 bis central bankers'speeches mas has been in active dialogue with the us treasury to ensure that our monetary policy framework and the role of foreign exchange intervention operations are well understood. the criteria the us treasury uses is part of a generic framework that it has developed to assess the policies of its major trading partners. while the assessment is unable to incorporate the unique characteristics of individual countries, the us treasury has indeed acknowledged in its report the uniqueness of singapore ’ s exchange - rate based monetary policy system. singapore ’ s inclusion in the us treasury report has no direct consequences for the economy or the conduct of mas ’ monetary policy. mas will continue to manage the s $ neer as we assess to be appropriate, for price stability. we will also continue to engage in constructive dialogue with the us treasury to explain the underlying structural factors which impinge on our current account and mas ’ fx interventions. the sustained accumulation of ofr over the years meant that mas ’ stock of ofr was in excess of what was needed to conduct our exchange rate - centred monetary policy. mas has assessed that ofr equivalent to at least 65 % of gdp would provide a sufficiently strong buffer against stresses in the global economy and financial markets. our ofr, at the end of q1 2019, was more than 80 % of gdp. we therefore decided to transfer s $ 45 billion from ofr to the government for investment on a longer - term basis with expected higher returns. in return, the government will reduce its deposits with mas by the same amount. this means that mas ’ balance sheet will show a reduction in foreign assets of s $ 45 billion and an equivalent reduction in its domestic liabilities to the government. mas made a net profit of s $ 19. 2 billion in fy2018 / 19. the investment return from the ofr was s $ 26. 2 billion. this comprised foreign investment gains of s $ 25. 2 billion, and a small positive currency translation effect of s $ 1. 0 billion. after factoring in expenses of s $ 3. 1 billion from domestic and other operations, mas made an operating profit of s $ 23. 1 billion.