IT looked so simple, yet it went so badly wrong. Hedge funds, being highly leveraged and aggressively managed, have been hit by a double whammy. There was the St Valentine's Day massacre when trade frictions between the US and Japan drove the US dollar through the floor to near parity with the Japanese yen. Then European bond markets buckled. Hedge funds were wrong-footed, caught in the lethal cross-currents whipped up in the global bond and currency markets. Hedge funds had taken advantage of low Japanese yen borrowing costs to swap it into European currencies to buy European bonds. Taking the view the yen would lose ground to European currencies, there was every prospect of locking in currency gains over and above that to be had from a potential rally in European bonds. It was a bad call. The banks that allowed these funds to play the markets have become edgy. While some hedge funds have ceased trading temporarily, others have been forced to liquidate positions. The damage will not be known for the time being. In the meantime, the flood of money into US mutual funds is now a trickle. Americans poured a massive US$26 billion into international US mutual funds last year, compared with only US$5 billion in 1992. The difficulties of hedge funds, with losses of up to 25 per cent in the past month, is one reason why Hong Kong has taken a battering. It also explains the bruised performance of other regional markets. In addition the Japanese fiscal year end approaches, turning the Japanese into net sellers. The slide in HSBC's share price from a high this year of HK$131 reflects all this.. Although the 1993 results measured up to best expectations, the market is decidedly uncomfortable over prospects for HSBC's global treasury operations. HSBC, profiting from favourable global market trading conditions, made US$468 million (HK$5.3 billion) in exceptional ''dealing'' profits, which largely explained HSBC's better result. It will, however, be difficult to repeat. This jars, however, with outward signs of HSBC's higher risk profile on and, no doubt, off the balance sheet, to debt markets. Of HSBC's assets, US$26 billion, or 13 per cent, is represented by debt securities compared with US$15 billion, or eight per cent of assets in 1992. The market is left wondering if HSBC has also been caught wrong-footed. Barry Yates is a financial adviser and correspondent
