Thanong Khanthong says Asian currencies are entering a period of relative stabilisation following a retreat of the hedge funds.

LAST week the Quantum Fund of global financier George Soros was unwinding its short baht positions, resulting in a rally of the Thai currency to a one-year record high, Thai financial officials said. The retreat of Quantum Fund and other hedge funds reflects a radical adjustment in the global financial markets, which will become a major subject at this week's meeting of the Asia-Pacific Economic Cooperation.

Thai financial officials said the US regulators have reined in the activity of the hedge funds -- basically investment vehicles which make directional bets on global bonds, stocks and currencies -- by ordering the commercial banks to limit their risk exposure to the hedge funds. The result is that commercial bank lendings provided to the hedge funds to leverage their investments have been curtailed, hence helping to stabilise the financial markets in Asia and other emerging markets. The hedge funds have been blamed by Asian governments for contributing to the deepening of the financial crisis.

Tighter US regulation against the banks and the hedge funds came after the G-7 and G-22 meetings in Washington DC last month during the World Bank/IMF annual conference. Previously, hedge funds were not adequately regulated because they could register in any safe havens. Besides, US Securities and Exchange Commission regulations do not require any public disclosure for funds with less than 100 investors. There are about 4,000 hedge funds with combined assets of US$300 billion in the world, 3,000 of which are US.

After the collapse of the Long-Term Capital Management, the biggest US hedge fund, in September this year, the US regulators were on the defensive. LTCM was a unique story of financial catastrophe and lax regulation. The hedge fund had $4 billion in capital but was given money by the US and European banks to bet in the global financial markets worth $120 billion -- a leverage by 30 times. With this huge money, LTCM was able to hold $1 billion in off-balance-sheet derivative contracts.

Financial officials said LTCM made money by arbitraging its positions in the global financial markets. No matter how the markets of bonds, stocks or currencies moved, LTCM, which relied on a complex trading structure designed by two Nobel laureates, would still make money in a sure bet.

''But after the downfall of the Russian rouble, the markets moved down in all the same direction -- a rare incident which happens once in 100 years -- resulting in losses for LTCM. If LTCM was allowed to go under, it would lead to fire sales of its $1-trillion derivative contracts, which would have caused a break-down in the global payment system for the financial institutions would not be able to make delivery on contracts.

US Treasury Secretary Robert Rubin was grilled by other members of the G-22 meeting over why the US regulators had been allowing the banks to extend their loans to the hedge funds without adequate risk evaluations. Gordon Brown was particularly eloquent about the hedge funds. In the end, Rubin promised to take a look at the issue. The Bundesbank of Germany was assigned to study how to appropriately regulate the hedge funds.

Thereafter the US banks were told to limit their exposure to the hedge funds, resulting in the calling of the margin loans extended to the hedge funds which had built up huge positions in Asia. There were fears about the credit crunch in the US which would certainly bring about a slow down of the US economy, prompting the US Federal Reserve to cut the interest rates twice in less than 15 days. Now US officials believe that chances of the credit crunch in the US are slim. In effect, the US will continue to be the locomotive of global growth.

There has been a big jolt in the hedge funds' operations, with the commercial banks tightening up their lending exposure to them. This has led to the hedge funds' unwinding their positions, resulting in the Japanese yen staging a rally since Oct 7 this year. Earlier most analysts believed that the yen should go to YEN 180 or YEN 200 to the dollar because Japan would not be able to tackle its banking crisis. What a spectacular turn-about in the global markets!

Since the regional currencies, which have been floated since last year, are tied to the Japanese yen, they have also appreciated with the yen against the US dollar, although there has not been any significant change in their fundamentals. The baht has risen from Bt38-Bt39 level to the US dollar to Bt36 level. Thai and Japanese officials agree that the regional currencies are entering a period of stabilisation, which will help improve the economic fundamentals.

Over the weekend a meeting of the deputy finance ministers in the region tried to stamp out additional work to augment the Manila Framework, agreed in Manila last year as a regional financial cooperation. Arif Othman, secretary general of the treasury of the Malaysia's Finance Ministry, was reported as saying that the meeting discussed calls in the international community to regulate the hedge funds, but there was no concrete proposal.