Hedge Funds Squeezed by World's Highest Rents Are Moving OutBy
Hong Kong hedge funds are leaving Central as Chinese move in
It’s hard to hire top talent if you’re ‘sitting in a shoebox’
Benjamin Fuchs raised eyebrows five years ago when he opened his hedge fund next to a place selling live chickens in Hong Kong’s hustling, bustling Tin Hau neighborhood.
It was akin to choosing Queens over Manhattan in New York -- or lowly Croydon over moneyed Mayfair in London.
But nowadays Fuchs is no outlier. He’s part of a swelling exodus of hedge funds from the tony confines of Hong Kong’s Central district, home to luxury landmarks like the Mandarin Oriental hotel.
The reason is simple: money. Soaring Hong Kong office rents, coupled with relentless pressure on hedge-fund fees industrywide, are prompting managers to choose between a fancy address and profits. Slowly, the stigma of being based outside Central, a hub of business life for most of Hong Kong’s history, is yielding to sober financial reality.
As Fuchs, who oversees $2.5 billion at BFAM Partners, puts it: “Investors ultimately care more about returns.” BFAM has posted an average annual gain of about 16 percent since its founding in 2012.
Similar shifts are underway elsewhere in the global financial industry, where nearly every executive wants to wring out costs. But in Hong Kong, a city where real estate is practically a religion, ditching Central for a less glamorous neighborhood can take a bit of adjustment.
Still, money talks. Wong Chuk Hang, an former industrial hub on the south shore of Hong Kong Island, and Cyberport, a business park on the island’s western fringe, are luring money managers who once might have aspired for the Central aeries of Exchange Square or the International Financial Centre.
Grade-A office rents in Central climbed 8.7 percent last year and may jump as much as 15 percent in 2017, fueled by Chinese demand and a dearth of new supply, data compiled by CBRE Group Inc. show. Businesses from China accounted for 42 percent of newly-leased floor area in the district last year, according to Jones Lang LaSalle Inc., which ranks Hong Kong as the world’s priciest market for office space.
“When the Chinese started to move in and pay higher rents, a lot of the funds -- when it came to renewal -- they moved out,’’ said Richard Johnston, the Hong Kong-based head of Asia at Albourne Partners, referring to buildings like IFC and Exchange Square.
Even at cheaper grade-A towers in Central, a 2,500 square-foot office that comfortably accommodates 10 people can cost about $350,000 a year, estimated Johnston, whose firm advises investors on alternative assets including hedge funds.
The industry is under growing pressure to cut expenses. Global net withdrawals totaled $70 billion last year, the first outflows since 2009, while fund liquidations rose to an eight-year high, according to Hedge Fund Research Inc. Fee levels have also declined as investors balked at paying for disappointing returns.
Hedge funds around the world have felt the squeeze. In London’s West End, the second-most expensive office market tracked by JLL, collapsing demand from asset managers fueled a first-quarter decline in the neighborhood’s rental rates. Boutique financial firms have historically leased about 80 percent of the area’s high-end office space, according to Cushman & Wakefield Inc.
In Asia, where about 75 percent of hedge funds tracked by Eurekahedge Pte. oversee less than $100 million, it can be particularly difficult to achieve the scale needed to afford today’s prime office rates. Rent is typically among the two largest expenses for managers in Hong Kong, said Colin Jones, a manager on JLL’s Hong Kong market team.
Hedge funds don’t necessarily need to leave Central to save money. OCP Asia, a $1.3 billion manager that focuses on direct loans to small- and medium-sized companies, cut its rent by about 60 percent after moving to a 4,000-square-foot office in the Shanghai Commercial Bank Tower in Central from the nearby Landmark complex in September. By signing before the building’s completion, OCP was able to lock in the rate for three years with the option to renew, said Teall Edds, one of the firm’s co-founders.
The key is to strike the right balance between affordability and quality, said Albourne’s Johnston. While clients frown on hedge funds that splash out on expensive offices, they’re also wary of spaces that look too low-rent, he said.
“It’s hard to convince people you are going to hire top people sitting in a shoebox,’’ Johnston said. “Imagine going down to one of these older buildings with a tiny window and a noisy air-con. Believe me, it sort of shakes your confidence.’’
Harold Kim, an ex-Citigroup Inc. managing director who founded Neo Risk Investment Advisors in 2015, opted for an office in the One Island South building in Wong Chuk Hang, which is reinventing itself as a business and arts hub.
Kim said his firm’s 2,000 square-foot office is anywhere from one-half to one-third cheaper than the space he considered in Central. While One Island South is just 30 minutes away via subway, monthly rents run in the high HK$20s ($2.60) to low $HK30s per square foot, according to JLL. That compares with as much as HK$160 in Exchange Square and the IFC.
Cyberport, a government-backed development designed to promote the digital industry, has attracted several money managers. Those who meet the zone’s entry criteria can either lease their own office or rent stations in a co-working space for as little as HK$800 a month, according to Cyberport’s management company.
Ortus Capital Management, a global currency manager that oversees about $750 million, and Seres Asset Management, the Asia stock hedge fund co-founded by Bear Stearns Cos. alumnus Evan Erlanson, both made the move to Cyberport from Central. Other tenants include Three Stones Capital, a multistrategy hedge fund started by former Societe Generale SA traders, and Jomon Investment Management (HK), a macro hedge fund led Markus Thielen.
Joel Werner, who runs an Asia equity fund at Solitude Capital Management, set up his firm in a serviced office in Causeway Bay -- a popular shopping area that’s also home to the Hong Kong operations of LinkedIn Corp. and Alphabet Inc.’s Google. His contract includes an option to terminate the lease with 30 days notice, along with the flexibility to add more space if his four-person team grows. For something similar in Central, Werner said he’d have to sign a long-term contract.
“I can put capital into my business, I can put capital into my fund, or I can post a letter of credit to back a two- to three-year lease to a Hong Kong landlord,’’ Werner said. “One of the reasons that a lot of people quit is that they spend way too much money on their operating overhead.’’