Hedge Funds and the Asian Currency Crisis of 1997

Abstract

We test the hypothesis that hedge funds were responsible for the crash in the Asian currencies in late 1997. To do so, we develop estimates of the changing positions of the largest ten currency funds in one currency, the Malaysian ringgit and to a basket of Asian currencies. Our methodology is adapted from the Sharpe’s (1992) style analysis approach that decomposes fund returns. We find that the net long or short positions in the ringgit or its correlates did fluctuate dramatically over the last four years. However, these fluctuations were not associated with moves in the exchange rate. The estimated net positions of the major funds were not unusual during the crash period, nor were the profits of the funds during the crisis. In sum, we find no empirical evidence to support the hypothesis that George Soros, or any other hedge fund manager was responsible for the crisis. For a current copy of this paper, please contact: William N. Goetzmann Yale School of Management Box 208200 New Haven, CT 06511 (203) 432-5950 william.goetzmann@yale.edu http:\\viking.som.yale.edu Acknowledgments: We thank Tass for the use of their data. We thank Geert Rouwenhorst for helpful comments.