| India – The yen and hedge funds are at centre stage, but what will happen if China diversifies into holding the yen. |
| In an earlier article, I had referred to the large bets of hedge funds in the “carry tradeâ€Â, estimated at around $ 100 billion. The last few weeks seem to have witnessed hedge funds unwinding carry trades by buying the yen, even as Japanese investors continue to sell the domestic currency to invest abroad. Perhaps the most profitable investments have been in the New Zealand dollar: not only was/is there a huge “carry†to be earned in interest differential, but the dollar has appreciated from JPY 55 to JPY 80 over the last five years! |
| Carry trade is, however, only a small proportion of the hedge fund industry which now commands investment capital of the order of $ 1.5 trillion  with leveraging, the total investment in risky strategies, could be of the order of perhaps $ 4 trillion, a massive sum of money by any standards. With growing size, the industry is attracting more regulatory attention. In the US, new guidelines for the industry were issued in the last week of February but, overall, regulators prefer a light touch believing that hedge funds “are good for the markets†(EU internal market commissioner) and “have contributed of the financial system†(G7). |
Yen exchange rate and hedge funds
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