Bank of America’s Hedge-Fund Clients Boost Leverage in Asia

Hedge-fund clients of Bank of America Corp.’s Asian prime brokerage unit have increased their leverage since October as the market outlook improved, according to the second-largest U.S. bank by assets.

Gross leverage, which tracks hedge funds’ long and short positions as a multiple of the cash they get after selling all securities and repaying borrowings, have increased since late October through Jan. 17, said Ben Williams, Hong Kong-based head of Asia-Pacific financing sales in the bank’s Merrill Lynch unit. Shorting involves selling borrowed securities in anticipation of buying them back for a profit when their prices fall.

“This move has been more significant than other years,” Williams said in an interview yesterday. “There’s opportunity to do more things in Asia, whether long or short.”

The MSCI Asia-Pacific Index has gained more than 9 percent since the end of October as the U.S. moved toward a compromise on the so-called fiscal cliff, which referred to the risk of a government default from fiscal negotiation over more than $600 billion in spending cuts and tax increases, and the European debt crisis eased, while economic outlooks for Japan and China improved along with prospects of corporate earnings growth. Rebounding markets also helped revive fundraising, Williams said.

Companies in the Asia-Pacific region and their shareholders sold more than $57 billion worth of shares and convertible bonds in the last four months, almost twice the amount in the fourth quarter of 2011, according to data compiled by Bloomberg.

Turnover Uptick

“There’s been a general uptick in turnover across Asia, being led by Hong Kong and China,” Williams said. “High volumes and more mass participation have created deal flows and chief financial officers and chief executive officers are looking at opportunities to sell stock and pay down debt.”

Bank of America has also seen hedge fund clients, which had little or no investments in Asia, primarily large global funds that may not have offices here, enter the regional market recently, Williams said.

Asia-focused hedge funds returned about 10 percent in 2012, with 8 percent of the gains coming in the second half, according to Singapore-based data provider Eurekahedge Pte.

China’s Shanghai Composite Index has gained almost 24 percent since trading near a four-year low on Dec. 3 amid signs of an economic recovery. China’s economic growth accelerated for the first time in two years in the fourth quarter.

Overseas investors’ demand for yuan-denominated shares quoted in China led to the recent surge in trading turnover and premiums of Hong Kong-listed exchange-traded funds linked to the so-called A shares, Silvia Fun, an analyst at CCB International Securities Ltd., wrote in report dated Dec. 17.

A Shares

CSOP FTSE China A50 ETF, a Hong Kong-traded fund started in November to track the performance of the FTSE China A50 Index of the 50 largest A-share companies, now manages 18.5 billion yuan ($3 billion), according to data compiled by Bloomberg. Last week’s trading volume for the fund more than tripled compared with the first week in November, according to the data.

Japan’s Nikkei 225 Stock Average advanced 24 percent in the past three months as a weaker yen boosted the earnings outlook for exporters. There is also optimism that the new government led by Prime Minister Shinzo Abe will increase pressure on the central bank to do more to end deflation.

Prime brokerage provides hedge-fund client services including settling trades, lending cash and securities.

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