Fund - HSBC

Background:

When HSBC acquired Edmond Safra’s Republic Bank, including its hedge fund business in 1999, it also gained a hedge fund track record that stretched back to 1989. This headstart in the alternative investment world has served the bank well, contributing to its emergence as the largest single provider of alternative assets in Switzerland. And, as the InvestHedge Billion Dollar Club indicates, it ranks as the second-biggest FoHF manager in global terms. At the end of December 2010, HSBC managed $39.5 billion in alternative products, of which hedge fund and advisory portfolios constituted $29.8 billion. With the majority of assets booked in Switzerland, the Geneva operation retains a key role in the group’s global activities.

As part of the HSBC Private Bank, and a product and service provider to the bank, private clients are an important segment for the alternative asset group. In contrast to many of its larger peers, which depend on the US for a large portion of their business, HSBC’s institutional and high-net-worth clientele are largely concentrated in Europe, the Middle East and Asia. Discretionary and advisory mandates have historically constituted a significant proportion of HSBC’s business and are mostly managed out of Geneva, while HSBC Alternative Investments Limited (HAIL) in London functions as the manufacturer of FoHF products. By offering a wide spectrum of investment options, clients can either buy into a fund for as little as $25,000 or choose an advisory mandate for a minimum investment of $20 million.

HSBC’s investment process is very much oriented towards bottom-up manager selection. As Peter Rigg, head of the Alternative Investment Group and a member of the Executive Committee at HSBC, points out: “Top-down asset allocation is very important but, at the end of the day, we need to maintain our focus on finding managers who can provide strong absolute returns throughout different economic cycles.

“We’ve seen a tremendous dispersion of fortunes among various hedge funds this year. Some funds, like Paulson, are down significantly, while other funds are doing the opposite. So it really does come down to manager selection.”

With a team of 45 analysts, HSBC tracks the performance of 2,400 hedge funds and conducts quantitative and qualitative analysis on 1,000 funds in its database. “It’s important to constantly listen to what our clients are saying and, given our big platform, we have clients looking for the new hot ticket – the next George Soros or Paul Tudor Jones,” says Rigg.

HSBC is currently considering a move toward greater concentration in its portfolios. Rigg maintains that where they hold strong convictions in regard to a manager, they should aim to take reasonable-sized positions. In this way, combined with good due diligence and deep research, HSBC’s managers should be able “to squeeze all the goodness out of the portfolio and achieve absolute returns”.

Like so many Geneva-based fund of funds houses, HSBC also felt the huge impact of the financial crash. Total hedge fund assets fell sharply from $46.6 billion in mid-2008 to the current total of $29.8 billion. In its largest fund, HSBC GH, the group’s global multi-strategy flagship vehicle, assets plunged 54% from $3.3 billion in 2008 during the period to May 2009. Since then, they have steadily recovered to reach $2.7 billion.

By not imposing any gates or suspensions on the funds during the financial crisis, as well as offering monthly redemptions in most of the major funds, HSBC functioned for a period like an ATM machine for distressed investors. However, Rigg and his colleagues believe that by treating their customers fairly, and continuing to deliver relatively good performance, they have steadily recovered some of the lost ground. The firm’s overall pace of recovery is reflected in a recent survey, carried out by InvestHedge, which tracked the growth of Swiss FoHF assets during the year ending 30 September 2011. It shows that the increase of almost $3 million in HSBC’s overall assets puts the firm at the forefront of asset growth among Swiss firms.

HSBC drew a number of lessons from the events of 2008 to 2009, which continue to serve as guides for the firm’s business strategy. “The crisis reinforced the importance of keeping the liquidity of the underlying hedge funds in line with the liquidity you are offering investors,” says Rigg. “Also, by having a strong global research team on the ground, we could make sense as to what was going on and transmit that intelligence to our clients.”

During the liquidity crisis of 2008, HSBC’s funds benefited from being integral to a large bank. Having better access to credit allowed managers to borrow efficiently at a time when many competitors found that credit facilities were difficult to find.

“The most important change we made to our investment process was asset verification,” recounts Rigg. “After 2008, there was a widespread desire to gain more transparency from the underlying funds. Although we had good information about market exposures, we had less precise information as to where the assets were held. So verifying the assets is now a formal part of our due diligence and monitoring process.”

In November 2009, HSBC successfully launched its first UCITS FoHFs, the HSBC UCITS AdvantEdge Fund, which has attracted $114 million in assets. The portfolio is composed of 19 holdings and represents one of the earliest UCITS FoHFs to be introduced to the market.

More recently, HSBC is planning to introduce its first emerging managers FoHFs in the fourth quarter of 2011. The new product will serve as either a standalone vehicle or as an option for investors who want to include an emerging managers component in their customised portfolios. Increasingly, HSBC is taking advantage of its scale to focus on early-stage investments, whereas it previously felt unable to invest in small funds due to its large range of both funds and clients. But now, it has turned that problem on its head and has identified a group of managers who are running promising funds, but are finding it difficult to raise capital.

“We will help managers move from a relatively small size, perhaps $80 million, so that they possibly can get up to $150 million,” explains Rigg.

“That will be extremely valuable since they will start to appear on the radar screens of other investors and then they can take off. We intend to acquire stakes of 20% to 50% in different managers and, obviously, we expect to get a favourable break for our investment – often on the fee side.”

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