Hong Kong Special Report - REVISED April 14

Developing a world-class
Asian hedge fund centre

Hong Kong
This report was researched and written
by Philip Moore, special reports writer for
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HedgeFund Intelligence 2 Special Report March 2014
HONG KONG 2014
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4 DEVELOPING A WORLD-CLASS ASIAN HEDGE FUND CENTRE
11 CONSTRAINTS AND CHALLENGES
13 EQUITY STRATEGIES STILL DOMINATE
17 GROWING THE REGIONAL INVESTOR BASE
19 CREATING A ROBUST OPERATIONAL INFRASTRUCTURE
20 ONSHORE/OFFSHORE CONVERGENCE
Contents
HONG KONG 2014 OVERVIEW
HedgeFund Intelligence March 2014 Special Report 5
OVERVIEW HONG KONG 2014 HONG KONG 2014 HONG KONG 2014
T
he year 2013 was a mixed one for Asian hedge funds in general
and for Hong Kongs hedge fund industry in particular. New funds
in the region raised $3.85 billion last year, according to AsiaHedge
data, down by almost 19% from 2012s total of $4.74 billion.
The number of new funds, however, grew to 71 from 65 suggesting
a decrease in average launch sizes.
Hong Kong, however, strengthened its position as Asias hedge fund capital in
2013, accounting for 53% of the assets raised by new funds at just over $2 billion
and being the location of choice for 28 of those 71 new funds.
By contrast, managers in its closest competitor, Singapore, raised just $469 mil-
lion, while those in Australia and Japan attracted $256 million and $100 million
respectively. Hong Kongs dominance was especially pronounced in the second
half of 2013, with 14 new launches raising $1.48 billion of a regional total of
$2.39 billion, equating to a market share of 62%.
Activity in the market in the rst quarter suggests that this 2014 total is set to
eclipse last years. In both Singapore and Hong Kong, it has been an extraordi-
narily busy start to the year, says Dan McNicholas, head of sales for alternative
investment servicing solutions, Asia-Pacic, at State Street in Hong Kong.
Hong Kong has established itself as the dominant centre in Asias fast-evolving hedge fund
world with a growing pool of local investment talent, with international-quality strengths
in infrastructure and operations, and with Chinas rapidly emerging asset management
industry as its backyard. Philip Moore reports on the challenges and the opportunities that lie
ahead in developing Hong Kong into a truly world-class global hedge fund centre
Number of new Asian hedge funds: by location of manager
Country 2008 2009 2010 2011 2012 2013
H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2
UK 4 6 1 6 0 0 0 1 1 2 3 2
Australia 4 4 2 4 5 2 7 5 4 4 4 3
Japan 1 1 3 5 3 0 2 0 1 0 4 3
Singapore 11 4 9 7 10 5 10 7 5 5 6 5
USA 4 0 3 2 4 0 0 1 1 2 2 1
Hong Kong 23 7 18 12 42 16 7 13 25 11 14 14
China 0 0 1 1 1 0 2 1 0 1 3 1
Other 3 3 2 1 5 3 0 2 2 1 2 4
Total 50 25 39 38 70 26 28 30 39 26 38 33
Source: AsiaHedge Database and survey
KEY FACTS
OVERVIEW
OVERVIEW HONG KONG 2014 HONG KONG 2014 HONG KONG 2014
Hong Kongs continued leadership of the Asian hedge fund industry is easy
enough to explain. Moodys sums up the territorys economic pre-eminence in
its most recent review, pointing to its very high per capita income and com-
petitiveness in a number of areas, including nancial services and internation-
al trade. The review added: In addition, Hong Kongs institutions are very
strong in the areas of governance, rule of law and transparency.
No other regional centre, say bankers, can match Hong Kong for these sound
economic and regulatory fundamentals, backed by an outstanding infrastruc-
ture and a favourable geographical location.
Hong Kong is the dominant hedge fund centre in
Asia, says Vasundhara Pradeep, managing director
of prime services, Asia-Pacic, at Credit Suisse in
Hong Kong. This is closely followed by Singapore
which, in addition to local managers, has seen a
growing number of Japanese managers establishing
a presence for regulatory reasons.
Singapore, say local bankers, is no longer perceived
as offering regulatory advantages relative to Hong
Kong, which was the case some years ago. They also
say that although Singapore has now reportedly
become a more expensive centre than Hong Kong,
the cost differences between Asias two premier
investment management hubs are not a decisive
factor for funds establishing a regional presence.
Instead, the location of the regions hedge funds
seems to be driven principally by their strategy.
Historically, credit and interest rate-driven strate-
gies have tended to gravitate towards Singapore,
while equity funds have been in Hong Kong, says
Chris Nash, chief operating ofcer at the Hong
Kong-based event-driven manager, Senrigan Capital.
According to the latest AsiaHedge asset survey
published this month, Hong Kong continues to be
Chris Nash, chief operating
ofcer, Senrigan Capital
>> Historically, credit
and interest rate-driven
strategies have tended
to gravitate towards
Singapore, while equity
funds have been in
Hong Kong >>
New Asian hedge fund assets under management: by location of manager
Country 2008 2009 2010 2011 2012 2013
H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2
$m $m $m $m $m $m $m $m $m $m $m $m
UK 140 58 25 274 0 0 0 10 38 36 297 0*
Australia 331 40 64 40 64 35 157 79 56 200 94 162
Japan 13 5 48 151 45 0 56 0 40 0 28 72
Singapore 515 123 317 334 262 411 764 188 192 59 246 224
USA 49 0 10 161 62 0 0 16 70 110 136 40
Hong Kong 1,414 150 612 500 1,897 532 2,098 1,023 3,094 795 545 1,481
China 0 0 10 10 250 0 15 10 0 24 98 20
Other 87 49 34 10 174 118 0 15 12 13 20 388
Total 2,549 426 1,120 1,481 2,753 1,096 3,091 1,341 3,501 1,237 1,464 2,388
Source: AsiaHedge Database and survey. Figures have been rounded *assets undisclosed
Hong Kong
Singapore
UK
Australia
USA
China
Japan
Other
KEY FACTS
New Asian hedge fund assets,
2013: by location of manager
OVERVIEW HONG KONG 2014 OVERVIEW CHINA 2013
the dominant location for managing Asian hedge fund assets cornering
a 34% market share of the Asia-Pacic industry with $54 billion of the
$159 billion total assets in Asian hedge funds at the end of 2013.
That represented a year-on-year growth rate of 20% on the $45 billion in
hedge fund assets that was managed out of Hong Kong at the end of 2012.
Australia is the next-largest hedge fund location in the region, with $29 billion,
while Singapores assets under management grew by almost 25% in 2013 to
top $25 billion by year-end.
Above all, however, Hong Kong has a backyard called China. True, econo-
mists, investors and other commentators have become increasingly jittery
about the outlook for the Chinese economy with scare stories abounding
about its shadow banking industry, for example, and the potential for a
credit collapse.
But the long-term potential of a country with a population of 1.36 billion
people remains mesmerising. According to the latest CapGemini/RBC Wealth
Management survey, in 2012 that population included 643,000 high-net-
worth individuals (HNWI) with assets of $3.1 trillion, which is more than a
quarter of the entire HNWI wealth sloshing around the Asia Pacic region.
In 2014, China-focused hedge fund managers continued to prosper in spite of
another disappointing year for the Shanghai Composite Index which fell by
6.8% in 2013, making it Asias worst-performing stock market last year.
Long/short Chinese equity was an attractive strategy last year, says Candy
Cheung, portfolio manager at SAIL Advisors in Hong Kong, a fund of hedge
fund manager which, as of January 2014, had $2.3 billion of assets under man-
agement across its ve funds two global strategies and three specialised Asia
and emerging-manager products.
MSCI China was at, while the A and H share markets were down about
8% and 5% respectively, Cheung adds. But our long/short China hedge
funds were on average up about 22%. A lot of that was due to the transforma-
tion of the Chinese economy, which has created a number of clear winners
and losers. There has been a lot of alpha to be made by managers focusing
not just on the beneciaries of Chinas economic transformation but also
on those identifying the right single names to short, because the ability to
HONG KONG 2014 HONG KONG 2014
short has improved considerably in recent years.
None of the China funds soared to the heights
achieved last year by the Avant Capital Eagle Fund,
a long/short Greater China equity product launched
in May 2010 that focuses on undervalued and
under-researched Chinese companies, most of
which are listed in Hong Kong or the US. In the year
to January 2014, the Avant Capital Eagle strategy
returned 214%.
It will be a tall order for China funds to eclipse that
eye-watering performance in 2014, but in the rst
quarter of the year there have been plenty of attrac-
tive opportunities for nimble stock pickers. There
were 47 Chinese IPOs in the rst two months of
2014, with an average uptick of 100%, says Max
Gottschalk, CEO of Gottex Asia in Hong Kong.
It was not only China-targeted funds that contin-
ued to generate healthy alpha in 2013. The most
striking performance in 2013 came from Japanese
equity long/short funds, many of which delivered
stellar returns of between 30% and 50%, says Aidan
Houlihan, managing director for alternative invest-
ment services in Asia at BNY Mellon in Hong Kong.
SAIL reports that Japanese equities have been an
increasingly signicant source of robust returns over
the past 12-18 months not exclusively because of the long-overdue dynamism
injected into the previously comatose Nikkei-225 index by Abenomics.
Three years ago I would have said that there were few exciting opportunities
for us in Japan, says its managing director and chief investment ofcer,
Harold Yoon. But last year we achieved very good balance between China
and Japan managers. Interestingly, we have not had a long bias in Japan.
We found that many of the best-performing Japan managers were either
market-neutral or trading-oriented.
Aidan Houlihan, managing
director for alternative
investment services in
Asia at BNY Mellon
>> The most striking
performance in 2013 came
from Japanese equity
long/short funds, many
of which delivered stellar
returns of 30%-50% >>
HedgeFund Intelligence 10 Special Report March 2014 HedgeFund Intelligence March 2014 Special Report 11
STRETCHED HUMAN RESOURCES
The resilience of Hong Kongs hedge fund industry
is especially impressive given the number of chal-
lenges that continue to weigh on its growth. One of
these is a shortage of human resources.
A lot of people tell me that it is difcult to hire
good people, especially at the back and middle-
ofce level, which is perceived to be the less
glamorous end of the business, says Tony Freeman.
Freeman is executive director: industry relations of
Omgeo, a specialist provider of automated solu-
tions for post-trade operations, which is a wholly
owned subsidiary of the Depository Trust
& Clearing Corporation (DTCC).
There is also a lack of experience at the most
senior C-suite level. At the top echelon of man-
agement the talent pool is not particularly deep,
says McNicholas at State Street. If there is a short-
age of people, it tends to be at the CFO, COO and
chief compliance ofcer level.
This may be surprising given the depth, pedigree and sophistication of the
nancial services industry in Hong Kong. It is less so, however, given the
relative immaturity of the Asian alternative investment management. Accord-
ing to Preqin, Asia-Pacic hedge funds represent less than 4% of the total
capital invested in the industry worldwide.
There is a limited pool of high-quality talent in Asia, which is a function of
the lifecycle and emerging nature of the industry where there arent as many
second or third-generation hedge fund managers providing a deep bench of
talent to draw upon, says Credit Suisses Pradeep. That, she says, means that
managers need to adopt an imaginative approach to recruitment of staff at the
front and back-ofce level. This is why many regional hedge funds are tapping
into talent from investment banks and the traditional asset management
industry, rather than relying solely on hiring from the buyside.
Asian hedge fund assets by location of manager: US$ billion
Country 2008 2009 2010 2011 2012 2013
Jun# Dec# Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec
UK 22.69 17.30 10.29 11.86 11.16 12.31 11.69 8.91 9.72 6.88 9.82 11.50
USA 40.37 27.39 24.76 26.75 29.10 27.88 24.01 22.16 22.22 21.61 22.18 21.28
Australia 37.41 27.05 24.57 29.32 29.70 33.16 31.53 28.30 28.3 27.75 28.92 29.38
Japan 12.53 8.52 9.77 10.18 10.34 11.03 10.77 9.73 5.72 4.73 3.97 4.20
Hong Kong 33.46 22.18 27.42 31.12 32.51 38.28 38.89 40.53 47.05 45.04 50.39 54.21
China 1.03 0.62 0.62 0.47 3.44 3.80 3.58 5.77 6.82 8.18 8.77 8.48
Singapore 24.33 15.93 17.03 17.64 16.71 21.55 19.54 20.91 20.07 20.34 24.85 25.16
Other 3.71 3.44 4.30 5.14 4.79 4.39 4.64 4.32 4.49 4.56 3.94 4.59
Total 175.53 122.43 118.75 132.48 137.75 152.39 144.65 140.62 144.39 139.08 152.84 158.79
Source: AsiaHedge # adjusted
Hong Kong
Australia
Singapore
USA
UK
China
Japan
Other
Asian hedge fund assets,
Dec-2013: by manager location
KEY FACTS
HONG KONG 2014
Harold Yoon, CIO, SAIL
>> Last year we achieved
very good balance
between China and
Japan managers >>
HONG KONG 2014
Teng also believes that the Asian alternatives investment management indus-
try needs more support from local heavyweight institutions. A game-changer
for absolute return funds here would be if regional institutions put aside a
pot of money specically for allocation to Hong Kong-based absolute return
strategies, he says.
There are other alternatives for would-be market entrants. We have a fairly
solid but highly focused pipeline of start-ups, says one market participant. But
were also seeing very strong growth in multi-manager platforms. Because so
much money is gravitating towards the larger funds, and because the hurdles to
launching a hedge fund business are multiple, many of the larger managers with
well-regarded brands are creating multi-manager platforms that are attracting
a number of these high-quality managers in the region.
EQUITY STRATEGIES STILL DOMINATE
A third restrictive characteristic of the Asian hedge fund industry in general,
and the Hong Kong market in particular, has been its failure to diversify much
beyond the long/short equity and long-bias equity strategies that continue to
dominate the alternative investment funds landscape.
The most recent survey of Hong Kong-based hedge funds published by the
Securities and Futures Commission (SFC) was released over a year ago and is
A second constraint to the development of the Hong Kong hedge fund indus-
try is the relative shortage of capital available for start-ups. There have been
some successful start-ups, but 90% of money has been gravitating to the bigger
managers, says Colin Lunn, head of fund services for Asia-Pacic at UBS
in Hong Kong. Managers with less than $100 million are nding it hard to
garner interest from institutions writing $10 million tickets.
Senrigans Nash agrees that conditions have remained difcult for start-ups
over the last year. Break-even thresholds in terms of AUM have clearly not
diminished, he says. Managers unable to attract sufcient AUM struggle
to meet the costs of setting up businesses that will meet the requirements of
institutional investors.
That is a disheartening trend for leading Hong Kong-based funds of hedge
funds like SAIL Advisors, which has a preference for smaller funds. A number
of former traders on banks prop desks have been trying to set up on their own,
but they have struggled because unlike in Europe and the US there is a shortage
of seed capital in Asia, says Yoon. The big seeders tend to go to the big funds.
That, he adds, is a pity, given SAILs focus on the alpha-generating potential
of some of the less well-known names. Were big believers in avoiding funds
that are too large, he says. There is a set of managers with AUM below $100
million which dont command the attention of western institutional investors,
where we can be early investors.
Other fund of hedge funds managers agree that shortage of capital for start-
ups is an ongoing challenge for the local hedge fund industry. For the region
to be successful, start-ups as well as the big, established managers need to
be able to attract capital, says Ed Littmann, senior vice president at Mesirow
Advanced Strategies in Hong Kong.
One manager who has direct personal experience of the challenges facing
would-be start-ups in Hong Kong is Fredric Teng, chief operating ofcer
of Oracle Capital, which runs a highly successful structured credit strategy.
He says that raising funds was a formidable challenge when Oracle was set
up in 2010. AIFMD, he says, has made the process of fund-raising even more
challenging. Small, emerging funds need European capital because that is
what is going to help them get from $100 to $300 million AUM, he says.
There is a limited
pool of high-quality
talent in Asia, which
is a function of
the lifecycle and
emerging nature
of the industry
updated only to September 2012. According to this
data which market participants say will not have
changed dramatically over the past 18 months
equity long/short strategies accounted for 33.1% of
the $87.1 billion managed by the 676 funds licensed
by the SFC in September 2012. Multi-strategy funds,
funds of funds and global macro contributed 30.8%,
11.2% and 8.3%.
Local bankers say that the emphasis on long-bias
funds in Hong Kong is in part a reection of the
regulatory constraints on shorting in regional mar-
kets, especially the A-share segment.
Gradually, however, the universe of Hong Kong-
based alternative funds is becoming more diversi-
ed, which is in part attributable to the demise of a
number of long-bias China funds in the downturn
of 2008. Long/short equity is still the dominant
strategy, but we are seeing more relative value, mac-
ro and credit funds being set up, says Yoon at SAIL.
Long/short credit strategies accounted for just 2.7%
of Hong Kongs hedge fund assets as of September
2012, but are identied by some managers as one of
the most exciting growth areas for the industry.
The Hong Kong-based Prudence Investment
Management, for example, was set up in 2008
to participate in the nascent Chinese credit market. Its Prudence Enhanced
Income Fund, some 80% of which is invested in Chinese corporate credit,
saw its assets rise to $500 million by the end of 2013.
The longest-standing credit player of them all, however, is Income Partners
(IP), which was founded in 1993 by Emil Nguy and Francis Tija, with support
from minority shareholders Banque Prive Edmond de Rothschild and Lloyd
George Management. Today, IP is fully independent and wholly owned
by management, and manages $1.4 billion across a range of asset classes
with xed income at the core of the business.
Asia is equity-biased today, so imagine what it was like 20 years ago, says
Nguy, who explains that when IP was launched, it was with the objective of
establishing itself as an independent market leader in Asian xed-income
investment. It was a formidable challenge for several reasons. The US xed-
income market was characterised by high liquidity, a deep investor base and a
strong regulatory framework, he says. Asia was the diametric opposite. It had
10 different economies, 10 different currencies and 10 different regulatory
regimes, making it difcult to dene the asset class. The investor base was
also highly fragmented, which is why we knew from day one that we would
not have natural buyers of Asian debt in the region.
Fast-forward a couple of decades, says Nguy, and the prospects for Asian xed
income look very different. The depth and liquidity of the asset class, both
in dollars and local currencies, makes it unrecognisable from the embryonic
market that confronted IP at its launch. So too does its diversity and growth
Fredric Teng, COO of
Oracle Capital
>> A game-changer for
absolute return funds
here would be if regional
institutions put aside
a pot of money specically
for allocation to Hong
Kong-based absolute
return strategies >>
Top 5 new Asian hedge funds in 2013: assets at time of survey
Fund AUM $m
ARCM Master Fund II 1,000*
Oryza Capital 260*
Alcova Mosaic Fund 220*
Trigram Global Macro Fund 210
PM Capital Global Opportunities Fund 153
Top 5 new Asian hedge funds in 2012: assets at time of survey
Fund AUM $m
Tybourne Equity Master Fund 1,000*
ARCM Master Fund 960
BFAM Asian Opportunities Master Fund 400*
Voltex Asia 250*
GLG Asia Long-Short Fund 180
Source: AsiaHedge new fund surveys *Estimate
prospects, with the RMB-denominated market in
China having added perhaps the most exciting new
dimension to the regions xed income landscape.
This has been an especially encouraging develop-
ment for IP, which in July 2013 became the rst in-
dependent, non-bank Hong Kong-based manager
to be granted an RMB Qualied Foreign Institu-
tional Investor (RQFII) asset management licence
from the China Securities Regulatory Commission.
Nguy says there are three other key elements sup-
porting the growth of Asian xed opportunities.
The rst is what he describes as the multi-year
global credit quality trend, which is leading to a
convergence in ratings between developed and
emerging markets. The multi-year upgrade cycle
in Asia, coinciding with downgrades in developed
markets, is leading to an increase in long-term
investment ows into Asia, he says. That means
we no longer need to sell the concept of the asset
class to investors in Europe and the US.
The second is that a much stronger regional inves-
tor base, encompassing institutions, family ofces and HNWI, is taking shape
in Asia. Unlike 10 or 15 years ago, we now have a readily identiable captive
investor base looking to buy Asian credit, says Nguy.
Third, with derivatives markets across the region increasingly accessible, liq-
uid and cost-effective, absolute return credit strategies are growing in popular-
ity. When we set up, we were a long-only manager, in part because of our
knowledge base, but also because it was not until 2000 that Asia had a CDS
market, says Nguy. We were the rst non-bank in Asia to sign an ISDA [Inter-
national Swaps and Derivatives Association] agreement, which has allowed us
to achieve more of a balance between long-bias and absolute return strategies.
The performance of some Asian credit strategies bears witness to the oppor-
tunities created by an increasingly deep regional derivatives market. Oracles
structured credit fund, for example, returned 76% between inception in 2010
and the end of January 2014. CLO issuance last year was back to 2005-2006
levels, says Teng. That has been important to us, because it has given us much
more of an opportunity to trade in the secondary market.
THE PROSPECT OF CHINESE DEFAULTS
A wild card, as far as the development of the Chinese credit market is con-
cerned, is the likely fall-out from the default of a corporate issuer. In March,
Chaori Solar Energy Science & Technology warned that it might be unable to
meet an interest payment on a bond issued in 2012, which would trigger the
rst default by a Chinese corporate borrower.
Paradoxically, a number of analysts believe that a default by Chaori Solar
would help to support the development of Chinas corporate bond market,
because it would increase the importance of credit risk assessment in pricing
and therefore enhance the efciency of xed income in the allocation of capital.
In a report published soon after Chaoris announcement, Moodys commented
that a default would also signal the regulators higher tolerance for corporate bond
defaults amid nancial market reforms. This, the ratings agency says, is in line
with the current central administrations shift to more market-oriented policies.
Compared to the offshore bond market, bondholder protections are weak in
Chinas onshore market, and bondholder-recovery mechanisms in the event of
a bond issuers insolvency are untested, Moodys added.
For instance, the absence of covenants in the onshore market means that
bondholders cannot take proactive steps, such as enforcing accelerated bond
repayment, when bond issuers default on other debt.
GROWING THE REGIONAL INVESTOR BASE
A fourth notable feature of the Asian hedge fund industry has traditionally been its
reliance on money from the US and Europe to buttress its growth, although man-
agers say that an increasingly conspicuous trend is strengthening regional demand.
We still have strong links with our traditional European investor base, but
over the last three to four years Id say that about 40% to 50% of our funds
have come from Asia, says Nguy at IP.
Emil Nguy, co-founder
of Income Partners
>> Unlike 10 or 15 years
ago, we now have a
readily identiable captive
investor base looking to
buy Asian credit >>
HONG KONG 2014
agers, and it is creating an exciting opportunity for us to play a role educating
managers and providing services for them.
CREATING A ROBUST OPERATIONAL INFRASTRUCTURE
Others agree that the process of institutionalisation of the hedge fund industry
is having a profound impact on its structure in Asia. The biggest increase in
investment in Hong Kong hedge funds is coming from institutional investors,
including sovereign wealth funds from Japan, China, Singapore and Australia,
says Omgeos Tony Freeman. While these organisations are open to taking some
risks in their investment strategy, they are very risk-averse from an operations,
technology and reputational perspective.
This, says Freeman, is pushing local managers to step up their investment in
their back and middle ofce capabilities, which is adding to their overall cost
base and is in turn squeezing out some of the medium-sized players. As well as
buying systems to automate post-trade processing in a more efcient way, and
employing more people to full processing and reporting obligations, a number
of hedge funds are employing chief risk ofcers for the rst time, says Freeman.
Smaller players focusing on a very specic market niche have relatively modest
operational and technological requirements, Freeman adds. The vulnerable
funds will be those in the middle ground which traditionally allocated most of
their investment to research and trading. So I think well see more polarisation
between the niche managers at one end and the largest funds at the other.
This is an unusually large share by the standards of Asian hedge funds, which
are generally dependent for the lions share of their assets on investors from
outside the region, most notably from the US.
BNY Mellons Houlihan estimates that 80 cents in every dollar raised for Asian
alternative products comes from US investors. Europeans make up most of the
remainder, leaving very little from regional sources,
Houlihan adds. I dont see this distribution chang-
ing much as we go into 2015. Asian funds arent
marketing aggressively into Europe. Because they
are largely dependent on reverse enquiry for Euro-
pean participation, AIFMD is unlikely to have a big
impact on the geographical split of fund-raising.
Views are mixed on the long-term impact that
changes in the structure of the investor base will
have on the alternative investment management
industry in Hong Kong. At State Street, McNicholas
says that the progressive institutionalisation of
the industry is leading to a much greater focus on
improved compliance standards and operational
efciencies, which in turn is creating a goldmine of
opportunities for a range of service providers.
Although this is a global trend, McNicholas says that
it is probably more pronounced in Hong Kong than
in more developed hedge fund centres. For mid-size
managers operating out of Manhattan, the incremen-
tal step to creating more of an institutional sset-up is
not that signicant, although it may mean hiring an
additional legal or compliance specialist, he says.
Managers who have not previously operated in a
regulated environment are stepping into a world of
AIFMD and FATCA, and the obligation to navigate
regulatory systems in 14 different jurisdictions,
adds McNicholas. That is a big challenge for man-
Dan McNicholas, head
of sales for alternative
investment servicing
solutions, Asia-Pacic
at State Street
>> Managers who have
not previously operated in
a regulated environment
are stepping into a world
of AIFMD and FATCA, and
the obligation to navigate
regulatory systems in 14
different jurisdictions >>
Prime brokers caution, however, against assuming
that practices that may be generally accepted in the
US and Europe will necessarily be embraced in Asia.
They say that there is a wall of money looking for a
home in the region, much of which is inevitably
owing towards a handful of the China-based
specialists that have been spectacularly successful in
generating alpha in recent years. That is allowing
some of the top China managers to dictate their
own terms on reporting and transparency stand-
ards, as well as on pricing.
McNicholas at State Street recognises the signi-
cance of this challenge. Its true that many of the
funds HNW and private bank investors may not see
the need for robust operations and improved com-
pliance, he says. But our challenge is to convince
them that if they are going to raise institutional
funds and become true global asset managers they
will quickly nd that investors will demand an extra
level of compliance and operational infrastructure.
ONSHORE/OFFSHORE CONVERGENCE
On the face of it, the holy grail for investors in Hong
Kong-based China funds is the combination of
local expertise, on-the-ground research capability
and a demonstrable track record on the one hand,
and institutional operational standards and procedures on the other.
I believe that over the next 10 years there will be a huge amount of
convergence between onshore managers coming offshore and vice versa, says
McNicholas. This will create tremendous opportunities for the best in class
from each of these pools to navigate both worlds.
Some say that this is a combination that few, if any, managers have yet been
able or willing to achieve. Take the example of Prime Capital Management,
the sparklingly successful outt led by Lin Yujin, which was the subject of a
recent Financial Times piece that described the manager as highly secretive,
a description few would contest.
Prime Capital closed its Greater China long/short equity strategy, the Dragon
Billion China Fund, to new investors in early 2011 with assets of some $1.4 billion.
That represented a meteoric rise for a fund that in 2008 had about $300 million.
But with growth in AUM, say some, came an apparent erosion in transparency
standards. We were initially getting reporting with a one-month lag, then with a
three-month lag and then with a six-month lag, says
one early investor in the Dragon Billion China Fund.
THE BENEFITS OF TRANSPARENCY
Hong Kong-based funds of funds say that they make
a point of avoiding products that are short on clear-
ly communicated strategies and regular reporting.
Transparency is extremely important to us, says
SAILs Cheung.
We have sometimes found that some of the small-
er managers tend to be more transparent. In some
cases we have established agreements very early in
our relationships with new managers to ensure that
there is no deterioration in the quality or regularity
of reporting as their AUM grows.
Local bankers say, however, that they were surprised
at what they saw as the censorious tone of the FT
article. I thought it was an unhelpful story because
it made the assumption that all investors demand
transparency, says one. Many in Asia are perfectly
happy with high returns and dont expect daily
reporting or insights into their managers positions.
Its a fair point. So what if a star portfolio manager
like Wang Yawei, the former China AMC portfolio
manager who now runs Top Ace Management in
Tony Freeman, executive
director: industry relations
of Omgeo
>> The biggest increase in
investment in Hong Kong
hedge funds is coming
from institutional
investors, including
sovereign wealth funds
from Japan, China,
Singapore and Australia >>
Candy Cheung, portfolio
manager at SAIL Advisors
>> We have established
agreements very early
in our relationships
with new managers to
ensure that there is no
deterioration in the quality
or regularity of reporting
as their AUM grows >>
HONG KONG 2014
Our experience is that some but not all China
managers with a very good track record have solid and
transparent investment processes, says Max Gottschalk,
chief executive of Gottex Asia in Hong Kong.
He speaks with considerable authority, given that
since its acquisition in 2012 of the Hong Kong-
based Penjing Asset Management, Gottex has be-
come one of the largest fund of hedge funds in Asia.
Some are more secretive than others, especially at
the larger end of the market, and investing in new
funds requires a fair amount of due diligence. But
on the whole we are comfortable with the quality of
reporting of China managers with strong research-
based capabilities on the mainland.
Besides, Gottschalk adds that the strengthening of
operational procedures by some of the less experi-
enced managers should be a symbiotic process. We
have helped some managers to reach compliance
standards that international investors will be com-
fortable with, he says.
MUTUAL RECOGNITION
The process of convergence will be galvanised over
the much longer term, say local bankers, by the in-
vestment funds mutual-recognition arrangement between Hong Kongs SFC,
CSRC and Chinas State Administration of Foreign Exchange (SAFE).
At the seventh annual conference of the Hong Kong Investment Funds Associa-
tion in December, the SFC and CSRC disclosed that they were in the nal stretch
of the mutual-recognition project. Their working groups are now working on the
nal details covering areas such as minimum AUM, fund managers experience in
terms of years in operation and parameters on the percentage of local investors.
At UBS, Lunn says that in its initial stages the mutual-recognition project is
likely to apply only to authorised mutual funds, but that over time its remit will
Hong Kong, chooses to play his cards close to his chest and never talks to the
press? Few investors in his China equity long/short fund, which was launched
at the start of 2013, are likely to complain as long as it continues to perform as
it did in its rst year, when it delivered a 35% return.
Look at it from the perspective of some of the super-stars of the China fund
sector, says one market participant. These managers are in many cases already
running several billion dollars, and have built up an impressive track record.
They dont care too much about US compliance requirements because they
dont manage any US institutional money. Theyre not comfortable with offer-
ing managed accounts or daily positional reporting because they are concerned
about replication. That does not make them fundamentally awed managers.
Some probably rank among the best managers in the world.
That may be. But others say that a number of QFII sub-advisers and so-called
sunshine funds that have a presence in Hong Kong are already at, or near, the
magic convergence point at which they can offer China-driven performance based
on local knowledge, blended with internationally recognised operational practices.
The privately managed sunshine funds, according to a KPMG report, derive
their name from the contrast between the transparent and regulated environ-
ment that sunshine funds operate within versus the privately managed,
self-funded world of the underground hedge fund.
Colin Lunn, head of fund
services for Asia-Pacic
at UBS in Hong Kong
>> The mutual-recognition
project will open up an
important avenue for
distribution of hedge
funds in China using Hong
Kong-domiciled vehicles >>
HONG KONG 2014
HONG KONG 2014
be extended to cover alternative strategies as well. Were still a couple of years
away from this, but it will open up an important avenue for distribution of
hedge funds in China using Hong Kong-domiciled vehicles, he says.
It will also prize open more opportunities for managers from the mainland.
As EY advises in a recent report on the initiative: With the upcoming mutual
recognition arrangement, Chinese fund managers will take this opportunity to
promote their onshore products to international markets via Hong Kong and
leverage their synergy with Hong Kong upon the implementation of the mutu-
al-recognition programme.
In other words, as Lunn says, the mutual-recognition scheme is another piece
in the jigsaw that is progressively coming together to internationalise the Chi-
nese nancial services industry. In that sense, it complements initiatives such
as QFII, R-QFII and the Qualied Domestic Limited Partner scheme, which
has given six hedge funds quotas of $50 million each to raise on the mainland
for investment overseas.
Formed in 2001, Omgeo automates
trade lifecycle events between
investment managers, broker/
dealers and custodian banks,
enabling 6,500 clients and 80
technology partners in 52 countries
around the world to seamlessly
connect and interoperate.
By automating and streamlining
post-trade operations, Omgeo
enables clients to accelerate the
clearing and settlement of trades,
and better manage and reduce
their counterparty and credit risk.
Omgeos strength lies within its
global community and its ability
to create solutions to enable
clients to realize clear returns on
their investment strategies, while
responding to changing market
and regulatory conditions.
Across borders, asset classes, and
trade lifecycles, Omgeo is the
global standard for operational
efficiency across the investment
industry. Omgeo is a subsidiary
of The Depository Trust & Clearing
Corporation (DTCC).
For further information contact:
Omgeo
Tel: +852 3762 3176
Email: askomgeoasia@omgeo.com
Website: www.omgeo.com/hedgefunds
Sponsor
AsiaHedge would like to welcome Sunshine Funds to its already substantial database of over 1,500 funds.
Our Sunshine Funds are representedinEnglishandwe are adding toour current list eachweek. As a preliminary
welcome ofer the Sunshine Funds will be available free toall those whosubscribe tothe AsiaHedge Database.
INTRODUCING SUNSHINE FUNDS TO
If you are interested in taking a look at the Chinese onshore alternative funds, why dont you ask for a database
demonstration? Contact us on: +44 (0) 207 779 7339 or email us at: information@hedgefundintelligence.com
Hong Kong
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