IT will soon be clear if the wings of hedge funds will be clipped when world leaders convene at the World Bank/IMF meeting in Washington DC to contemplate on rebuilding the global financial system.

Apart from promising a US$30-billion bail-out package for crisis-stricken economies in Asia, Kiichi Miyazawa, the Japanese finance minister, has indicated that he may propose regulations on hedge funds at the G-7 meeting. His position is that emerging market economies will face big risks on their stability if they allow short-term capital to move freely while hedge funds lie in wait for opportunities before they strike. Once short-term capital is curbed, business will be taken away from hedge funds.

''The Japanese realise that hedge funds have been causing turmoil in different countries and they are keen to do something about it. Yet every time they float the idea to regulate hedge funds, the US comes up with a strong objection,'' a Thai official said. ''Emerging market economies should make a loud noise and throw their support behind Japan.''

Hedge funds are investment vehicles which operate secretly and are beyond regulatory control because of their prospectuses and legal status. Their principal partners and managers are often free to use a variety of investment techniques, including short positions, transactions in derivative securities, and leverage, to raise returns and cushion risks.

In May 1997 alone, hedge funds, foreign banks and foreign investment banks launched a global attack against the baht, unleashing $20 billion from their portfolios to rip the Thai currency peg system apart. The report on a study conducted by the International Monetary Fund, ''Hedge Fund and Financial Market Dynamics'', published in May, did not find hedge funds villains in the global finance market, arguing that hedge funds too can be wrong.

''Even though they apparently sold some long-dated forward contracts on the baht in February 1997, the bulk of hedge funds' forward sales to the Bank of Thailand appears to have occurred only in May at the tail-end of the process,'' the study said.

''If herd behaviour contributed to the crisis, then hedge funds were at the rear, not the front of the herd, as appears to have been understood by domestic corporates, domestic banks, international commercial and investment banks.''

The IMF study said hedge funds had made wrong bets, like in 1994 when they put their money on a decline in industrial countries' interest rates and ended up suffering losses when interest rates rose unexpectedly. Despite them making profits from the 1997 baht devaluation, they had been caught off-guard by the financial contagion and incurred substantial losses from their position in other Asian markets.

It was Dr Mahathir Mohamad, the Malaysian prime minister, who complained bitterly about hedge funds and called on the IMF to study and find ways to regulate their activities. ''Hedge Fund and Financial Market Dynamics'' expresses a rather neutral opinion against hedge funds.

Mahathir, badly disappointed, had been pondering seriously how to deal with hedge funds. One hedge fund was reported to have been holding a short position against the ringgit, worth 15 per cent of Malaysia's gross domestic product.

Prospects for Hong Kong do not look too good either, as authorities fight the nasty battle against hedge funds, foreign banks and investment banks, which is starting to cost them about $15 billion.

With Malaysia being driven into a corner, Mahathir last month decided to be unorthodox and announced the closure of the offshore ringgit market along with a series of capital controls to try and halt the decline of the economy.

In fact, back in May 1997 -- about a week after Thai authorities fought the fatal battle against hedge funds -- the Bank of Thailand hosted a meeting of regional central bankers to discuss measures to stem speculative attacks on their currencies.

The Thai side proposed that information be exchanged between regional central banks on the activity and the identities of hedge funds in the event of speculative attacks on a currency. The Hong Kong Monetary Authority and the Monetary Authority of Singapore objected, arguing that the proposal ran against the trend of financial liberalisation.

Then, Andrew Sheng, deputy chief executive of the Hong Kong Monetary authority, pointed out that hedge funds would be making money whichever way the market moves. Hedge funds, he said, were well-prepared and obtained necessary funding in advance. If the interest rate is raised significantly to defend a currency, hedge funds would benefit from lending borrowed money at a much higher rate. On the other hand, if authorities give in and devalue the currency, they make profits from their short positions.

It now appears that Hong Kong authorities are doing every thing possible, some even buying up blue-chip stocks, to ward off speculative attacks from hedge funds aimed at destroying its currency board system.

Curbs short-term capital flow which keep the country attractive to foreign investment is being discussed in Thailand. The Bank of Thailand has required BIBF banks to set aside as 7 per cent of their short-term capital as reserves to increase the cost of short-term borrowings. Yet the measure is too late to deal with the massive inflow of capital during the early 1990s, which wrecked havoc the Thai economy in 1997.

''There should be measures to regulate short-term inflows of capital into stocks or money market instruments like bills of exchange [B/E], financial options or derivatives,'' a foreign banker based in Thailand said. ''If the 'hot money' is brought under control, then the country can make sure that all foreign capital flowing into the country is for long-term purposes.''