HSBC Holdings Plc’s private bank unit, which invests $25 billion in hedge funds globally, sees opportunities in backing new Asia-based managers, said Henry Lee, its regional head of alternative investment group.
About 15 percent of the managers in a HSBC program that provides capital to smaller hedge funds are based in Asia, Lee said in an interview in Hong Kong yesterday. It has made early-stage investments in regional managers such as Hong Kong-based Zeal Asset Management Ltd., Myriad Asset Management Ltd. and Tybourne Capital Management (HK) Ltd.
HSBC is eyeing early-stage investments in Asia managers as rivals have reduced research staff in the region after the 2008 global financial crisis in attempts to cut costs, raising barriers for smaller hedge funds to expand assets.
“With less proprietary trading than before and less assets under management trading those hedge-fund strategies than before, Asia’s markets are providing an excellent playground for talented individuals to express themselves,” Lee said. While chances to back early-stage managers abound in the U.S. and Europe, “we feel Asia provides just as good opportunities and we are willing to spend time doing it.”
It’s cheaper to run a hedge fund in Asia where small hedge funds also find it difficult to raise capital, according to a report released by Citigroup Inc. in December. Fifty-seven percent of the 167 Asia equity long-short hedge funds started with less than $50 million still manage less than that amount after an average of 5.3 years in existence, according to data from Singapore-based Eurekahedge Pte cited in the report.
HSBC was an early investor in now multi-billion-dollar global hedge-fund managers such as Brevan Howard Asset Management LLP, Lansdowne Partners Ltd., Third Point LLC and Two Sigma Investments LLC, according to Lee. In 2011, it started a “next generation” program globally to invest in new hedge funds that have the potential of becoming future winners in an attempt to replicate the success of earlier ad hoc investments, he said.
Under the program, HSBC private bank invests in new managers with less than $300 million in assets through a $100 million fund-of-funds, he said. It is allowed to account for as much as half of a small fund’s assets, instead of the usual 10 percent limit, he said.
HSBC also allows private-bank clients to pick their own investments with the next-generation program, he added.
Less than $3 billion of HSBC private bank’s total hedge-fund investments are made through funds-of-funds, with the rest being held in custom-made accounts for clients, Lee said.
It maintains a list of 150 hedge funds globally that it has invested in or considers eligible for investment, Lee said. Among those are 13 Asia-based funds which it has invested in for clients.
The private bank has a “focus list” of 12 hedge funds, including those run by Och-Ziff Capital Management Group LLC and Millennium Management LLC that it recommends to Asian clients, Lee said. Four of them are based in Asia, he said.
It used to sell only funds-of-funds to Asian clients or pick investments for their custom-made accounts. Since earlier this year, it started to allow regional customers to pick their own hedge-fund investments manager by manager from the list, Lee said.
HSBC plans to add one more Asia manager as it expands the “focus list” to 15 funds in the next couple of months, Lee said. “We’re trying to introduce more of an Asian flavor locally.”