HSBC Global Asset Management eyes opportunities for Asian-based and Ucits hedge funds

HSBC Global Asset Management sees opportunities in Ucits and traditional hedge funds particularly in Asia and emerging markets, leveraging the resources of one of the world’s largest banks.

“Asia is in our DNA,” declares Charles Robinson, head of alternative distribution at HSBC Global Asset Management. This is what you would expect, he says, of the Hong Kong and Shanghai Banking Group (HSBC). In one way or another HSBC has been involved in banking and trading between China and Europe for well over 100 years.

The original banking corporation, founded in 1865 in Hong Kong, has grown since its early days. HSBC Global Asset Management is one of the largest managers of emerging market assets globally, with ­$90 billion under management in this asset class at end December 2009. Total assets under management were $411.25 billion at the end of June 2010.

It has a network of offices in over 30 countries and territories around the world with strong relationships with corporates, institutions and financial intermediaries of all sizes and types. As part of HSBC global banking and markets, a division of HSBC Holdings, the parent company of HSBC Group, it has access to around 8,000 offices in 87 countries and territories in Europe, Asia-Pacific, North and South America and the Middle East. With assets of $2,418 billion at June 30, 2010, it is one of the world’s largest banking and financial services organisations.

HSBC Global Asset Management offers clients around the world a diverse and full range of active and quantitative investment products including equity, fixed income, liquidity and alternative strategies.

“We understand the culture for fund management,” notes Bill Maldonado, head of alternative investments at HSBC Global Asset Management who looks after the single manager hedge fund side of the business among other activities.

Assets under management at the end of the first quarter of 2010 totalled around $7 billion. “This is a very important area for us,” confirms Maldonado. Unusually for such a large manager, Ucits products now dominate the product range. “Ucits plays to our strengths,” he says. The largest single strategy hedge fund in the Ucits pot is the global macro fund with around $800 million AUM.

“We were an early mover into Ucits,” confirms Maldonado. “A lot of customers have been looking at hedge funds for a long time but were not able to access them due to internal constraints,” he adds.

“Ucits is the place where rubber hits the road,” says Robinson. “We have been talking to people about these products for some time. There is an increasing differentiation between alpha and beta products and we believe the Ucits products can offer alpha,” he adds.

What HSBC Global Asset Management has done is move existing Cayman-domiciled hedge funds into Ucits products where the strategies fit. Both Maldonado and Robinson believe the Ucits offering is a strong proposition for investors. While the Cayman products provided monthly liquidity, the Ucits funds offer daily liquidity, something many investors are keen to see. The framework in which the funds must operate is another comfort for investors but does mean that not every fund strategy can fit.

“If the strategy works in Ucits and works well and properly, we will house it in a Ucits wrapper. We want to have the broadest possible base. If a strategy cannot be fully implemented in Ucits, it will stay as an ­offshore-domiciled fund,” says Maldonado.

He eschews parallel Cayman/Ucits funds. If the strategy fits, the Cayman fund is discontinued. This way, says Maldonado, he avoids different leverage limits and fee structures between two types of funds while achieving the same high performance.

There are exceptions. Within the range of funds offered some will stay as Cayman structures.

“Distressed debt would have to be a watered-down version in Ucits; it would be something else, a different strategy,” he says. “Our view is that if it is not a natural fit, we will not bend it to fit into Ucits.”

“The common perspective is that Ucits is a European phenomena clearly driven by the dark clouds of uncertainty over regulation,” adds Robinson. “From our perspective it is not just a retail success. Institutional investors are taking up Ucits in Asia. They have a different motivation. It is less to do with European regulation and more to do with a clearly perceived benefit of liquidity, transparency and regulation. Large Japanese institutional investors are coming into the funds.”

Maldonado confirms that he sees Ucits as “an interesting global brand. It is an unbelievably good story”. According to Maldonado, Ucits funds are recognised in a diverse geographical area including Hong Kong, Singapore, Brazil, Chile and Panama among others. “The majority of flow is from the Far East,” he confirms.

At present there are four Ucits funds all transferred into the European structure from the Cayman Islands. These include two funds launched in April this year: HSBC GIF GEM Equity Alpha Fund focused on global emerging markets, and HSBC GIF European Alpha Equity Fund. These were added to the Ucits platform domiciled in Luxembourg. Other existing funds include the HSBC GIF Global Macro, HSBC GIF Global Currency, and HSBC GIF Global Bond Market ­Neutral funds.

Moving into Ucits products where it makes sense is a hedge against legislation expected to come out of the European Union in the form of the alternative investment fund managers (AIFM) directive. “We don’t know what AIFM will say. The key issue is third-country funds. It’s hard to hedge against something you can’t see or against the implementation of a harsh regime. If third-country funds are excluded, Ucits funds may help,” explains Maldonado.

Ucits products, however, are not right for everyone. Maldonado admits it takes a lot more infrastructure to run Ucits funds than the Cayman registered hedge funds. “There are a lot of issues and you need a lot of resources,” he confirms. “Ucits funds need scale because of the liquidity requirements. They are more labour intensive with daily valuations. There are more investors usually. For small funds the costs are high,” he adds. Maldonado believes a Ucits fund that has only $50 million AUM is “probably very expensive to run, even on a platform”.

But HSBC Global Asset Management’s long-term game plan is not completely Euro-centric. Clearly the pull of the Far East is strong in the company and the emerging markets in Asia are attractive. Maldonado and Robinson both confirm the asset manager is actively looking for emerging managers in the region as well as fund opportunities. More single manager hedge funds either based in the region or run out of London are certainly on the cards.

“We measure our presence there [the Far East] in hundreds of years, not months. That knowledge of the region brings with it capabilities. We like to think we are unique. This is not something that is a satellite operation, but part of our DNA,” says Maldonado.

“I think emerging markets in general are of interest and new frontier markets are very interesting,” he adds. While he does not expect to be able to offer anything in the hedge fund area related to frontier markets, mainly because of illiquidity issues, he does believe China is likely to yield something before the end of the year.

For Maldonado hedge funds should be clearly “alpha extracting regardless of the direction of the market”. He leans towards funds that focus on the liquid, tradable market. He admits hedge fund managers need a lot of skills to extract alpha.

Maldonado is a fan of liquid strategies and what he calls “traditional methods”. For him a manager needs to believe in and understand in great detail why the strategy works. He prefers fundamental analysis and believes fundamental valuations should be at the core of most investment strategies.

“We want to have liquid strategies in the most liquid markets. But you need to be aware of liquidity. People often mistake liquidity for risk. For example, there’s a stock, very high trading volume, so it is perceived as a low risk. I can get out when I want, “ he notes.

“Liquidity can come and go. It’s transient. We can’t predict what might cause it to come and go. Risk is more about valuations. This is more important than how many shares are trading,” continues Maldonado.

“We typically run very liquid strategies. Distressed debt is probably one of our most illiquid strategies at the moment and it offers 60-day liquidity. Our Ucits funds are generally daily liquidity with Cayman offering monthly. We keep away from long lock-ups. We are at the other end of the spectrum,” he concludes.

Maldonado also thinks the hedge fund world has fundamentally changed after 2008. He believes the “romantic” era of hedge funds is over. The days when a manager could set up in a garage and run a fund are drawing to a close. In today’s environment a fund needs to be large enough to sustain a myriad of functions including compliance and operational risk management. With increased regulation, the entry threshold for funds will continue to rise, says Maldonado.

“We spend a lot of time meeting managers and trying to understand their edge and value added. I’m continually surprised at how difficult some people find it to explain why their approach might succeed,” he says.

The pool from which he draws talent is worldwide. What he is looking for is an idea he can be “comfortable” with. “We ideally want to know how and why it works. We want the manager to explain what his edge is, how he makes it work. We want to identify very clear sources of alpha. So we try to meet as many managers as we can and understand why they think their strategy works,” explains Maldonado.

Another aspect he considers is sales. “Can you sell it? We ask our marketing colleagues. It’s a combination of two things. We need to understand and believe there is true alpha generation and we need to know it is something investors will want to invest in,” he says.

For Maldonado the most important ingredient is “a very, very clear understanding of how and why the manager adds value. It has to be demonstrable and testable. That is very difficult to do, but easy to say. We want to see managers with grit, with risk management skills,” he concludes.

Robinson agrees. “We are not interested in managers that say ‘I’m so clever. Here’s a paper portfolio.’ It is very different running a portfolio for real. If the strategy is very directional or relies on a lot of leverage it is even harder to identify the skill,” he says.

“We want to know how the business is run,” continues Robinson.

He and Maldonado admit not every manager is also a good businessman. Some do not want to grapple with the details of how a business is run. When that happens, HSBC Global Asset Management is happy to let a manager get on with what they like to do ­best, investment.

Maldonado and Robinson both think the hedge fund part of HSBC Global Asset Management has room for growth. “We’re seeing a lot of interesting funds and there is a lot of capacity to grow,” says Maldonado. He sees around 100 managers a year and thinks launching at least two funds a year will not stretch the alternatives division. He expects to see growth particularly in the Ucits funds. “I think there is a lot of room to grow. Because we like liquid and relatively non-directional, relatively low leveraged funds with alpha generation,” he says.

Robinson reflects that HSBC and the asset management arm have come through both the banking and hedge fund crisis “smelling of roses”. He is proud of the fact that no gates or side pockets were needed for any of the funds and believes the division did not “lose the plot” in 2008. “We have a clean bill of health and I think we can benefit in the current environment where directional managers are struggling,” says Robinson. “Our non directional funds held up in absolute and peer terms.”

Despite the expected steady stream of regulation over the next two to three years, both believe HSBC Global Asset Management will have a competitive advantage. They believe the infrastructure the banking side provides, with for example about 30 compliance staff, offers a “luxury most specialist hedge funds ­cannot afford”.