SG enters HK retail hedge fund market

The fund, called the MSCI Hedge Invest Guaranteed Fund, offers investors a guaranteed fixed coupon of 1.7% per annum plus a 100% capital guarantee at maturity. In addition, investors get a small level of exposure to the MSCI Hedge Invest Index, a hedge fund index created in June by Morgan Stanley Capital International and Lyxor, SG’s asset management arm, which tracks 74 hedge funds.

The minimum guaranteed return, combined with a relatively low level of participation in the underlying hedge fund index, is aimed at kick-starting interest in hedge fund products among retail investors by offering a low risk product with high returns, says Nicolas Reille, director, structured products, Asia ex-Japan, at SG in Hong Kong. “Distributors say retail investors have no interest in hedge funds, and believe it is a very risky investment. So for us, it’s a first step into the educational process regarding hedge funds. It’s a very conservative product with a high minimum return guarantee and small participation rate of 30% into the underlying index.”

The fund incorporates a proprietary SG option called nova, designed to take advantage of the absolute return approach of the hedge fund industry. The fund takes the two worst performing months of the index for each of the first four years and the worst performing month for the last nine months, and adds this onto the overall performance of the MSCI Hedge Invest Index over the life of the fund. By using the worst-of concept, SG is able to reduce the cost of the option and increase the guaranteed coupons and the participation rate of the fund.

However, the relatively low volatility of hedge fund returns means the inclusion of the worst months’ performance should not affect investors’ potential upside too much, says Reille. “Of course, if you do this kind of pay-off with equity, there would be absolutely no interest because the two worst-performing months can actually be very low as the underlying is very volatile,” he says. “But the hedge fund market is completely different, and the target is often to set a monthly return of between 0.5% and 1.5%, and there are very few negative months, so you do not really decrease the potential returns.”

The fund’s launch follows a change in regulations last May that paved the way for firms to launch hedge funds targeting the retail market in Hong Kong. So far, however, only a handful of firms, including JF Funds and HSBC, have launched retail hedge fund products. Some participants point to the snail-paced approvals process from Hong Kong’s regulator, the Securities and Futures Commission, for the low number of funds launched, but the response from retail investors has also been lukewarm amid a continued perception that hedge fund products are high risk. A survey last year from the Hong Kong Investment Funds Association showed that only one fifth of Hong Kong’s mutual fund investors would consider buying hedge funds.

“We hope this fund will trigger some interest from investors, as our approach is very different from the other fund of hedge funds that have been launched in the market,” says Reille. “So, it’s capital guaranteed, but on top of that, there is a high minimum return. And also we do not use a manager, we use an index, which is probably easier to understand as well.”

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