Hong Kong's hedge fund industry: Why it will continue to grow

May 12, 2015 08:40
Hong Kong's robust market infrastructure and its status as a prime offshore RMB center are big draw for global hedge funds. Photo: Bloomberg

Hong Kong's asset management industry has been expanding steadily in recent years.

The healthy growth is in stark contrast with 2011, when more than 140 Asia-focused hedge funds were estimated to have closed shop due to capital-raising difficulties.

In 2013, the growth in the number of licensed asset management firms (or known as the type 9) surpassed all other types of licensed corporations including brokerages (or known as type 1 and traditionally the biggest group).

At the moment, the total number of licensed asset management firms is over 1000. Among others, hedge funds in particular contribute significantly to the asset management industry in Hong Kong.

Hedge funds' contribution

Since 2012, the number of hedge funds managed in Hong Kong has increased by 100. The total assets under management by these hedge funds has increased by 38.8 percent during the period, and the number of licensed hedge fund managers in the city has gone up by 15 percent to over 400.

According to the March SFC hedge fund survey, the most popular investment strategies are equity long/short (28.1 percent) and multi-strategy (40.8 percent, of which equity long/short is one of the most common strategies) .

By asset class, equities and equities derivatives are the biggest. In terms of markets, Asia Pacific (63.9 percent) gets the lion’s share of capital while in terms of investor source, America (43.6 percent) tops the list.

Institutional investors (66.9 percent), including funds of funds, financial institutions, pension funds, endowments/foundations, sovereign wealth funds and government-related entities, continue to be the largest group by investor type.

Hong Kong’s advantage in RMB business

As a result of the region's economic growth, China has accumulated huge savings and significant wealth, from which Hong Kong continues to benefit given its favorable geographical location and a long history of close relationship with the mainland.

Overseas investors see Hong Kong as the ideal and pre-eminent offshore renminbi centre. Since China’s stock markets are not open to all global investors, Hong Kong, as the largest renminbi offshore market, serves as the perfect alternate channel.

Hong Kong now plays an important role in bridging onshore and offshore renminbi markets and promotes the healthy circulation of renminbi funds.

Following a series of financial reforms, Hong Kong was the first offshore location to offer renminbi personal banking and launch offshore renminbi bonds, followed by renminbi cross-border trade settlement and direct investment and the Renminbi Qualified Foreign Institutional Investor (RQFII) schemes.

The launch of the Shanghai-Hong Kong Stock connect further accelerated the offshore renminbi business in Hong Kong.

RQFII allows qualified investors to raise funds in Hong Kong and channel such funds to directly invest in mainland securities market. This scheme along with QFII is the first step to internationalize the renminbi, allowing global institutional investors to invest in the Chinese capital market.

Hong Kong has developed into the largest offshore renminbi business hub, and has also played a critical role in the internationalization of the renminbi. With the largest pool of renminbi liquidity outside mainland China, more market players are participating in the RQFII scheme in Hong Kong and launching innovative funds with diverse strategies.

Another advantage of Hong Kong is the wide variety of retail renminbi-denominated products available, including equity-linked instruments with renminbi features, renminbi dim sum bond funds and fixed-income funds, and a renminbi trading counter for a Hong Kong dollar-denominated gold ETF.

In particular, there is no doubt about the ongoing demand for renminbi dim sum bonds and retail renminbi offshore fixed income funds in Hong Kong as renminbi is always thought to be undervalued due to manipulation by Beijing.

Mainland groups’ participation

Mainland-related companies have been an integral part of Hong Kong's hedge fund industry. At the end of 2013, 28 mainland-related fund groups together managed 194 SFC authorized retail funds here, boasting a net asset value that topped HK$145 billion.

Recently, more mainland fund managers are coming to Hong Kong to set up hedge fund operations. It seems that Hong Kong not only continues to attract investment funds from around the world but also the professionals and their capital.

The growth of mainland participation in the Hong Kong market has accelerated the growth of hedge fund market in the city.

Shenzhen-Hong Kong Stock Connect is expected to be announced later this year or next year. That is likely to lead to more money flowing into the hedge fund industry.

With a robust market infrastructure, a broad range of financial offerings and strong collaboration between Hong Kong and mainland authorities to create renminbi investment opportunities, the hedge fund industry will continue to flourish in Hong Kong—arguably the best place to bridge international liquidity with mainland financial products.

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Josephine Chung is Director of CompliancePlus Consulting Ltd. and Kaka Chiu is a compliance analyst.