First retail hedge funds approved in HK

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The first hedge funds to target Hong Kong’s retail investors have been approved by the Special Administrative Region’s regulator, the Securities and Futures Commission. Three hedge funds received approval at the end of last year, with more expected to follow in the next few months.

Hong Kong-based fund manager JF Funds obtained authorisation for two funds – the JF Asia Absolute Return Fund and JF Greater China Absolute Return Fund – while HSBC Asset Management received approval for its HSBC Global Strategy Hedge Fund.

The approvals follow changes in regulations last May to allow fund managers to market single strategy hedge funds, funds of hedge funds, and capital-guaranteed hedge funds to retail investors, with minimum subscriptions of $50,000 and $10,000 for the single strategy fund and funds of hedge funds respectively. There is no minimum subscription for funds with a 100% capital guarantee.

The JF Greater China fund, which is scheduled to close at the time of press, is a macro-strategy hedge fund that includes equity long/short, some index and index futures positions and forward currency exchange contracts, focusing largely on Hong Kong, Taiwan and China. The JF Asia Absolute Return Fund, meanwhile, is planned for launch later this year. The HSBC Global Strategy Hedge Fund is a multi-strategy fund of hedge funds with a bias towards equity strategies, although up to 30% of the fund will be invested in global macro and arbitrage strategies. The fund will invest in between 30 and 40 underlying hedge funds chosen from a database of 700.

A number of other fund managers are in the process of obtaining approval. Investec Asset Management, Dresdner RCM Global Investors, Schroders Investment Management and SG, a division of French bank Société Générale are all expected to launch retail offerings in 2003. Schroders for instance plans to introduce its flagship fund of hedge funds, Blue Star and Blue Sea, to retail investors later this year, says Nicholas Chalmers, associate director in the alternative investment group at Schroders in Hong Kong.

While a number of managers are waiting to see how the market develops before launching products, hopes are high given the success of Hong Kong’s capital guaranteed fund market among retail investors. In the first 11 months of 2002, capital-guaranteed funds captured 49.5% of the Hong Kong mutual fund industry’s net sales. “To the extent that investors are a little bit less cautious but not yet comfortable enough to buy into equity markets, hedge funds would seem a natural extension for those who want to participate in equity-type returns but want to have some downside protection,” says Chalmers.

ING Investment Management’s regional business development director in Hong Kong, Chuck Chan, however, says hedge funds will be a hard sell given their disappointing performance in 2002. “There was a lot of hype about it last year and now that they can be authorised, unfortunately, the returns don’t look as attractive,” he says. Chan, however, adds that the firm has not ruled out a retail hedge fund offering, and will see how the market develops. SF

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