Hong Kong continues to strengthen its position as the top financial centre in Asia (photo credit:Imre Der)

Two new reports have highlighted the strong growth in Hong Kong's fund management industry and the city's position as the top financial centre in Asia.

Hong Kong fund managers were taking care of HK$4.52 trillion (US$581.5 billion) at the end of last year, up 25 per cent on 2004, according to a newly released annual survey by the city's Securities and Futures Commission.

That takes two-year growth in assets under management to 54 per cent and marks the fourth consecutive year of growth. Assets under management in Hong Kong have now nearly tripled since 2001.

"This further illustrates Hong Kong's development of expertise in managing
investments in Asia, which strengthens Hong Kong's position as a gateway into the (Chinese) mainland as well as the rest of Asia," the SFC said.

"Hong Kong possesses a critical mass of professional talents with expertise developed in investments in Asia, particularly China."

Action hot spot

Last year another 57 companies were granted SFC licences to operate in the fund management industry. The SFC survey found 217 companies and institutions were involved in fund management last year.

Among new developments in the industry, the SFC authorised the first four Real Estate Investment Trusts (REITs) to list on Hong Kong's stock market with a combined market capitalisation of about HK$49 billion (US$6.3 billion) at the end of June. It also authorised Asia's first bond index tracking funds.

"Hong Kong is where the action is, it's right next to China," said David Devine, Managing Director of Lynas Capital, a boutique regional fund house based in the city.

"Tokyo is a bit of a backwater by comparison. Singapore has some advantages in terms of the cost of setting up but it is quite a controlled place. The government has a lot of control over the investment and listed companies."

Heavyweights choose HK

Meanwhile another survey by Institutional Investor's Alpha magazine found four of the five biggest hedge funds in Asia are based in Hong Kong. They are PMA Capital Management with US$2.07 billion under management, Asia Debt Management with US$1.44 billion, Ward Ferry Management with US$1.4 billion, and Penta Investment Advisors with US$925 million. Only Tokyo-based Sparx Asset Management with US$5.24 billion is bigger among hedge funds in Asia, the survey found.

"Asia is the fastest-growing area in hedge funds," said Alpha magazine. That's not surprising given an Asia benchmark produced a 22.4 per cent return last year, compared with 6.5 per cent for a Europe index and just 4.9 per cent for Standard & Poor's 500 index, a gauge of large US companies."

The fund management industry tends to view Japan as a separate asset from the rest of Asia due to the size of its economy and its different economic cycle. Japan has also not been favoured for running investments across Asia as it is geographically remote and Tokyo's Narita airport has poor transport links with the downtown area.

Hong Kong and Singapore have traditionally vied for the position of fund management centre for non-Japan Asia, but Hong Kong has taken a firm lead in recent years, particularly with the rapid rise of China to become the world's fourth biggest economy.

In the Alpha survey only one of the top 10 hedge funds, Halberdier Capital Management, is based in Singapore.

Leading edge

"If you are looking at the number of hedge funds set up then Singapore still leads Hong Kong. But if you are looking at asset under management then Hong Kong exceeds Singapore by a large margin," said Chi Lee, Director at Forsyth Partners Hong Kong Ltd, an asset management company which creates funds of hedge funds.

It comes down to geography, with Hong Kong conveniently placed not only for its own market but also the large and liquid stock markets of Taiwan and South Korea, he said. The listing of giant Chinese state-owned companies, such as China Construction Bank last year and Bank of China this year, is another attraction for setting up in Hong Kong.

Further, reforms are gradually allowing funds to flow from China into overseas investments and quotas of foreign money to invest in China's domestic stock markets. "Hong Kong will go from strength to strength," said Forsyth's Mr Lee.

The big hedge funds in Europe and the US have chosen Hong Kong to base their operations because of the extra services they need from investment banks to perform their complex investment strategies. Hong Kong has long been the Asia regional headquarters for most of the big investment banks.