Hong Kong’s retail investors will be able to buy hedge funds from the third quarter of this year, following a ruling by the Securities and Futures Commission (SFC), in May.
But the first wave is likely to be almost exclusively made up of the large traditional mutual fund firms, with specialised hedge funds unlikely to stray into the retail market, at least in the near term, say asset managers. “We are definitely not interested [in the retail market],” says Karl Hurst, managing director of HT Capital Management in Hong Kong. “We are a small boutique fund manager, and we have no ambitions to be a retail fund.”
Already, a number of mutual funds are preparing hedge fund products, with hopes to be included in the first batch of funds to be approved by the SFC, possibly as early as July. “We are going to be launching,” says Mark Konyn, chief marketing officer for Asia-Pacific at Dresdner RCM Global Investors, in Hong Kong. “We are working through the regulations, making sure that we comply, but are pretty confident that we do.”
The change in regulation follows a six-month consultation period with industry players, and is aimed at overhauling outdated rules to cater for increasing investor interest in alternative investments, according to the SFC. The new regulations come nearly a year after a similar move by Singapore’s regulators last June.
Under the new rules, Hong Kong’s retail investors will be able to invest in hedge funds with a 100% capital guarantee with no minimum investment requirement. For a fund of hedge funds, however, a minimum investment of $10,000 is required, and managers must invest in at least five underlying funds with no more than 30% invested in any one fund to ensure diversity. For single hedge fund strategies, perceived as having a higher risk by the SFC, investors must stump up an initial $50,000.
More controversial is the requirements for the managers themselves. The single hedge fund and fund of hedge fund managers need to have a minimum of $100 million in assets under management, along with five years’ experience in hedge fund strategies. The underlying funds in a fund of hedge funds do not require authorisation by the SFC, but managers still require two years’ experience in relevant investment strategies.
This has raised some criticism from smaller, Hong Kong-based fund managers that they may be left out in the cold. “My view is that they could have tried to do more to encourage a local hedge fund management industry,” says Raymond Wong, managing director of Cheetah Investment Management in Hong Kong. Only around five locally based fund managers are large enough to meet the criteria as it stands, Wong estimates, “and these funds that meet the requirements on size are unlikely to be interested in a $50,000 retail investment. For those that are smaller, they may like to, but they do not qualify”, he adds. Some of the most successful funds in the past have often been those start-ups with talented asset managers, but only $20 million or so under management, he says.
In response, the SFC stresses it is not discriminating against smaller hedge funds, pointing out that smaller funds can grow through participating as part of a fund of hedge funds. However, the SFC stresses provisions do need to be in place to protect retail investors, a stipulation that the larger mutual fund managers broadly agree with. “Anyone can set up a hedge fund without any criteria, so I can understand why the SFC has set this minimum,” says Matt Dillon, regional manager for Man Investment Products in Hong Kong. The company already has a $130 million hedge fund – approved in Hong Kong back in 1998 – a result of there being no official definitions as to what a hedge fund actually is, Dillon says. However, the firm is planning “one or more” extra funds, probably in the first batch.
Investec Asset Management is also planning to launch a hedge fund in the Hong Kong retail market, says Stewart Aldcroft, managing director of Asia in Hong Kong. He says size is an important factor in launching a product for the retail market. “If you are a smaller fund manager, you may not have the resources or distribution network with which to service the retail market,” he says. Aldcroft reckons that there will be about 15 funds in the first batch approved by the SFC, with the vast majority following the funds of hedge funds format.
Cheetah’s Wong agrees, adding that the barriers for larger global hedge funds to enter the Hong Kong market – such as setting up an office and hiring staff to process applications – may be too much to justify participation, particularly for those firms used to $1 million investments from institutional clients. “However, if a lot of retail money can be raised, then there may be a trickle down effect, and some of the larger funds might locate some of their capital to managers that are based in Hong Kong. But initially, I can’t see that happening in the near to medium term,” he says.