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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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Hedge Fund Managers Look to Asia for New Investment

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 for increased liquidity certainly does not bode well for most hedge fund strategies, but there is one market that seems to be shrugging off the liquidity rush.

According to a recent article from Bloomberg’s Bei Hu, Investors in the Asia-Pacfic region are stepping up in a big way to fill in the gap left behind by their American peers. Blackrock indicated that over half of its new money in the most illiquid, long-term fund categories, including direct corporate lending funds, has come from clients in the economically robust region. While American and European institutions look to reduce their balance sheets, especially in alternative assets, for economic and regulatory reasons, Asia based investors are looking towards the diversification opportunities provided by hedge funds.

Hedge Funds Seek to Fill Void Left by European Banks

With the dramatically reduced loan portfolios of rapidly deleveraging continental European banks such as Societe Generale and BNP Paribas, corporations within the Eurozone are struggling to access debt capital on favorable terms. It’s important to note that Europe has a substantially different perspective on corporate finance in comparison to American financial traditions. Where American companies commonly access the debt capital markets for corporate finance needs, European companies generally rely first on bank credit. The reduction in loan origination by Europe’s biggest banks has created a substantial capital void, and hedge funds are looking to capitalize on this opportunity.

Blackrock in particular is looking to enter the direct corporate finance market, especially in capital intensive European industries. One such industry is the aviation industry, where aircraft deliveries are expected to reach $95 billion this year, a 23 percent increase year over year. This is despite declining bank finance availability, which is forcing firms to be innovative in where they source their funds. Hedge fund managers are stepping up to the plate, offering direct loans. These loans offer carry attractive yields, due to the lack of traditional bank competition.

Hedge Funds Resilient due to Creativity

Despite weak market conditions and aggressive regulators looking to extract their pound of flesh, the hedge fund managers have remained, by and large, resilient. Sure, many funds have met a tragic end over the past several years, but the industry has lived on in the face of some “creative destruction.” The creativity and diversify of strategies used by the hedge fund industry has allows managers to adapt to the rapidly changing world around them since the bottom fell out in 2008. Whether funds seek out investors in new geographies such as the Asia-Pacific region, or look for opportunity in the shrinking balance sheets and loan portfolios of European banks, managers are constantly shifting their stance as the environment changes. From an industry that created so many innovative strategies, this should be expected. No matter what regulators or markets throw at them, hedge funds will likely live on in one form or another.

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