Along with economic growth and climbing individual wealth comes increasing demand for alternative asset classes. And increasingly, financial institutions are looking to Asia in order to expand their hedge fund businesses in line with this opportunity. HSBC is the most recent institution to look at one of its traditional markets and consider expansion of their hedge fund servicing business. As a regional leader in personal, commercial, and investment banking, HSBC is well positioned to take a role at the front of the line in the hedge fund prime brokerage business, however, as a late comer to the game, it has ground to make up.
Currently, the Asia-Pacific hedge fund servicing business is dominated by American banks, namely Goldman Sachs and Morgan Stanley, with some European players such as Credit Suisse also involved. There is certainly enough room for a few major players though, with total hedge fund assets in the region closing 2012 off at about $139 billion.
Some Trends Remain Concerning for the Asia-Pacific Hedge Fund Industry
Despite the region’s economic growth and promise, it hasn’t all been positive news in recent months. Total hedge fund assets in 2012 slipped 1 percent as a considerable number of funds, about one in twenty, were forced to close their doors due to declining revenue and increasing expenses. As a result, HSBC and its competitors are actively seeking out committed and established clients who are looking for a long term relationship.
“For everyone, it has been a challenging year. We definitely announced our arrival. We’re trying to pick the clients and partner with clients that really want to be trading counterparts of HSBC,” Melvyn Ford, the regional head of prime finance for HSBC, told Bloomberg.
Quality Over Quantity When it Comes to Hedge Fund Managers for HSBC
Industry surveys indicate that approximately $3 billion in hedge fund assets are currently placed with HSBC’s Asia Pacific team, with 80 percent of clients being established fund managers who have a considerable track record of operations. This provides the bank with reliable asset levels to sustain their operations. Much of the growth in the region will be focused on attracting additional assets from existing, high quality clients.
Moving forward, the bank doesn’t expect to take on any higher risk clients, instead seeking out a handful of experienced players. “I don’t envisage us taking a huge number of new prime clients based in the region, maybe between 5 and 10 a year,” Ford told Bloomberg.
Singapore and US Markets are Key Targets for HSBC
After an initial focus in attracting fund managers in “Greater China,” the team is beginning to shift its focus to Singapore and the United States in order to focus on those high quality fund managers. Perhaps surprisingly, the United States remains a lucrative market for Asia-Pacific hedge fund brokerage, with 70 percent of business still being conducted on behalf of U.S.-based clients. This focus on clients based in developed financial markets fits well with HSBC’s risk profile in the region – again, focused primarily on high quality hedge fund managers who are able to provide steady asset levels for their prime brokerage service.