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HSBC to Double Hedge Fund Prime Brokerage in Asia

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.

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Asian Hedge Fund Market Struggles Into New Year

According to a recent Bloomberg report, all is not well in the Asia hedge fund job market. Many high performing professionals that joined the rush to the promising boom in Asian hedge funds are now returning to the United States or Europe, or are alternatively leaving the industry for other areas of finance. Funds in the area have struggled to grow their asset bases, and regulatory changes certainly are not allowing for a positive outlook.

Asian Hedge Funds Continue to Struggle to Attract Assets

Following the 2008 global financial crisis, many overseas hedge funds saw a flight of capital returning to traditional destinations such as the United States. Unfortunately for the hedge fund desks of Hong Kong, Singapore and Malaysia, this capital has failed to return in the subsequent rebound. Currently, Asian hedge fund assets sit 28 percent below their 2007 peak, putting real pressure on firms to reduce costs in these jurisdictions. Globally, the opposite has been true, with hedge funds seeing a 21 percent increase in total assets to a new high of $2.3 trillion in December of 2012. This represents a real shift in assets back to traditional investment markets.

Performance has also been an ongoing issue in the region, with only 39 percent of Asian hedge funds entitled to performance fees for being above their high-water marks at the end of 2012. Without stronger bottom line results for investors, the attractiveness of investing overseas will certainly continue to decline, putting even greater pressure on hedge funds in the region.

Promise Not Living Up to Expectations

For many hedge fund professionals that made the move to Asia, the promise of expansive opportunity and high compensation has remained unfulfilled. According to Will Tan, Managing Director of a leading Singapore financial recruiting firm, “five years on, many of these guys are tired of the huge swings in hedge-fund compensation and some have not tasted the sweet promise of hedge-fund payouts.”

The dissatisfaction with results in Asia has led some individuals not only to reconsider their careers geographically, but leave the hedge fund industry altogether. According to Tan, many “long-time veterans (are) leaving the hedge fund space for more stable careers in finance.”

Smaller Funds Comprise the Majority of Asian Hedge Funds

One major shift over the last several years has been the emergence of smaller hedge funds in the Asian market. Currently, 54% of Asian hedge funds manage less than $50 million, which is up considerably from 39 percent just 5 years ago. Unfortunately for the smaller funds, the risk management policies of large investors sometimes prohibit allocating investment to those managing less than certain critical hurdle amounts, further reducing the number of interested investors.

Uncertainty and Volatility to Remain

While the story surrounding Asian hedge fund employment certainly does not appear too optimistic today, it’s important to keep the region in perspective. The geographic area contains several of the world’s fastest growing economies and is also home to an increasing amount of privatization of traditional government monopolies. These trends bode well for the investment industry, and there may be a cyclical rebound in future years. That said, increasing regulation and concerns over risk management from investors based in traditional markets will continue to weigh on the industry. As a result, uncertainty and volatility will continue to be underlying attributes to the Asian hedge fund market for the foreseeable future.

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Hedge Fund Industry Set to Grow in Asia

February 4, 2013

After a difficult 2011 where funds experienced returns far below relevant equity indices, the Asian hedge fund industry struggled to maintain their client base and assets under management throughout last year. With an average loss in 2011 of 12 percent, it isn’t hard to see why investors ran to the exits in the following months. […]

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Hedge Fund Managers Look to Asia for New Investment

December 10, 2012

With investment markets and institutional balance sheets on shaky ground in North America and Europe, hedge fund mangers are struggling to grow their assets under management in conventional markets. Institutions are looking for liquidity to meet cash obligations as well as reduce risk heading into what appears to be highly volatile market conditions. The search […]

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