As reported earlier, hedge funds may have themselves to blame – for not hedging enough – for losses in emerging markets. But Raghuram Rajan takes it one step further and blames hedge funds for the precipitous fall of emerging markets altogether. The chief economist for the International Monetary Fund suggested at a recent conference in Spain that hedge fund managers receive incentives to take on risk, which he says lowers the prices of risky assets at a time when interest rates are low. But emerging market assets could experience what the Financial Times calls a “wild swing in value” once global interest rates rise and liquidity dries up – and the hedge fund managers ditch their risky assets, hiking their prices. According to Rajan, the tumble in the emerging markets has nothing to do with problems in the economies of those countries themselves, but the activity of market players, such as hedge funds. He also labeled the countries as willing accomplices: “Extremely accommodative monetary policy, as well as a sense that policy will stay accommodative, engenders illiquidity-seeking behavior,” he told the conference. Rajan went on to say that HF managers may get paid generously for producing alpha, but many of them settle for producing what he calls “poor man’s alpha,” which involves holding illiquid assets to maturity.
