Hedge funds thrive in business-friendly HK (hktdc.com)


	Tom Ashworth, Managing Director of KE Absolute, says Hong Kong is the financial centre of choice for overseas hedge funds coming to Asia

	Stewart Aldcroft, Regional Director of Noble Investments, explains how investment strategists “on the spot" in Hong Kong are best placed to provide professional services

Asia is becoming a magnet for the world's leading hedge funds – and it is mostly Hong Kong where they are choosing to set up shop.

The rapid development of Asian stock and derivative markets in the past few years has caught the attention of top hedge funds, persuading them they need to have a presence in the region in addition to offices in the United States and Europe, say industry professionals.

"The latest trend for international hedge fund companies is coming to Asia, and Hong Kong is their choice almost without exception. At least 10 to 20 houses have come in the last 18 months," said Tom Ashworth, Managing Director of KE Absolute, a stock brokerage specialising in hedge funds.

Among the companies which have arrived in the city are US firms Citadel Investment Group and Elliott Advisors. Hong Kong and London were chosen as the twin home offices for Gandhara Advisors, a new hedge fund company with US$1.3 billion under management.

An obvious choice

Hedge funds differ from traditional fund management companies in that they may use alternative investment strategies to keep returns steady through bull and bear phases in stock markets. One commonly employed strategy used in Asia, called long-short, factors out moves in the overall market by buying good quality companies and then making negative bets on poorer quality peers. Hedge funds' clients tend to be high-net-worth individuals and financial institutions looking to diversify their investment portfolios.

Business-friendly Hong Kong, with its free flow of capital and firm rule of law, is an obvious choice for hedge funds, Mr Ashworth said. "Hong Kong is the capital of Asia. It has the critical mass. The three major business centres in the world are New York, London and Hong Kong. That is what it comes down to."

Hong Kong's biggest rival Singapore has "bent over backwards" to attract hedge funds, even offering tax breaks - but Hong Kong has caught up by developing a firm but friendly regulatory environment, Mr Ashworth said. In the last few months, Hong Kong has passed laws making offshore fund management companies exempt from profits tax and abolishing estate taxes.

Competitive edge

Singapore had US$6 billion under management by hedge funds according to a March speech by Monetary Authority of Singapore official Teo Swee Lian.

By contrast, hedge funds operating from Hong Kong had about US$17 billion in assets under management, according to figures cited by Martin Wheatley, Chairman of the Hong Kong Securities and Futures Commission.

"According to [consultancy] AsiaHedge, Hong Kong had the largest number of new Asian hedge funds within Asia in the year 2005, followed by Australia, Singapore and Japan," Mr Wheatley said.

Hong Kong's hedge fund industry was probably about three times larger than Singapore's, agreed Christoph Lee, Chairman of the Hong Kong chapter of the Alternative Investment Management Association.

"Hong Kong has always been an important centre for hedge funds and it is probably the leading centre in Asia," Mr Lee said.

"It's probably got nothing to do with local people buying hedge funds. It's more to do with Hong Kong's location and the growth of the industry itself. Hong Kong is on the doorstep of China. A lot of people who are in Asia are here because of China."

Foothold to China IPOs

China's emergence as a long-term investment story with average annual economic growth running at about 9 per cent has underlined the importance of being in Hong Kong, where Chinese companies tend to come for an overseas listing. In May, Hong Kong staged the world's biggest IPO in the last six years with the US$9.7 billion flotation of Bank of China, the second-biggest lender in the mainland. An even bigger flotation in Hong Kong by the mainland's top lender Industrial and Commercial Bank of China is slated for later this year.

Hong Kong's predominance as an Asian hedge fund centre may also be due to a concentration of prime brokers in the city, says Stewart Aldcroft, Regional Director of Noble Investments which uses hedge funds in its investment products.

Due to their specialist investment strategies, hedge funds require more assistance from stock brokers than traditional fund houses. Most of the big names including Morgan Stanley and Goldman Sachs have their regional headquarters in Hong Kong, where they are able to give professional services at a more experienced level, Mr Aldcroft added.

Another factor tipping the equation in Hong Kong's favour is its low personal tax rate of 16 per cent, which is a big attraction for highly paid hedge fund professionals, he said.