The following article takes a look at who is buying hedge funds in Asia. The intention is to give an outline of the market, and to show where there are opportunities for those in the hedge fund business to sell their product. However, a major issue all purveyors should be alert to, is whether they have the selling skills necessary to succeed.
1. Retail Fund Buyers
In the last year or so, the retail investor has heard a lot about the "coming-out" of hedge funds, but in reality such an investor has had very little exposure to the product. In Singapore and Hong Kong sales of hedge funds to the typical retail investor have hardly commenced. In Taiwan, although sales are being made, the distributors are working in a "grey area", as it is not currently possible to get funds authorised in Taiwan.
There are a number of independent financial advisers (IFA) who have been offering hedge funds to their clients, but these firms usually focus on the expatriate market(whether European, Australian or American), rather than the local investor. The funds offered have mainly been unauthorised products, often from fund managers based in Europe or the US and without representation in Asia. If at some later date complications arise, the distributors of these products might wish to reconsider their actions.
In 2001 retail banks in Hong Kong were responsible for more than 85% of all sales of mutual funds, as recorded by the Hong Kong Investment Funds Association. In Singapore, the figure is probably higher, at over 90% of sales. In Taiwan, the banks are also a major force in fund sales, and probably have a market share in excess of 70%. As a result, and due to the way in which banks are themselves regulated, they are obliged to only make available those funds that have been authorised by the local regulator. As most hedge funds are not yet authorised, the retail banks have not made sales to their customer base so far, but are preparing to do so.
There is no doubt that in the coming year or two, the retail banks are likely to become a major force in selling hedge funds, once the first of them start to be authorised by the regulators for retail distribution. Most of the major banks that have been involved in third party fund sales, have already spent some time giving training to their sales teams, with a view to getting them prepared for when a range of funds becomes available. It should be noted though, that in the case of most of the banks, they would rather wait until there is a sufficient choice of products available, before beginning to make appropriate recommendations to their customers. They don't want to be seen to only have a limited choice to offer. They wish to be able to demonstrate to their customers that they have done some research and analysis of the products, and have selected what they consider to be the most suitable for their particular customers.
In doing this research, they will no doubt be looking to make their assessments based on a number of specific criteria. These will include:
- Past performance record
- Experience of the manager
- Volatility of return
- Support provided for sales
- Transparency of information provided to the investor and adviser
2. Private Banks and High Net Worth Individuals
For many years, hedge funds have been considered the preserve of the High Net Worth Individual (HNWI), and his/her private bank adviser. This remains true today, to the extent that this is still the most successful breeding ground for sales of hedge funds. Private banks have often considered the need to use hedge funds for their HNWI customers, as part of the total portfolio they recommend. Typically a private bank advised portfolio would include securities, such as stocks and bonds, held on a direct basis, deposits, and a few mutual funds. However, as the hedge fund market developed in North America and Europe in the mid-nineties, it also migrated to Asia, and thus for the last few years, many of the clients of private banks have been invested in hedge funds.
It has been assumed that the typical customer of a private bank, as a person with higher net worth, is better able to understand the intricacies of hedge funds, how they work, the longer-term nature of investing in them, etc. This is probably correct, but perhaps the major increase in use of hedge funds only began once the Asian markets collapsed in 1997/98, and remained depressed for the following few years. This, quite obviously, was because many hedge funds were able to show positive returns during the period, in the face of collapsed and depressed markets all around them.
Many private banks will also adopt a detailed research methodology for the selection of suitable hedge funds for their customers, although in some instances, priority is given to the products issued by their own organisations, regardless of the excellence of the offering. In most instances this is initiated out of their head offices, usually in Europe or the US, and assumes that the product sold in those markets might also be of interest to investors in Asia. This could be a mistaken approach, although to date there is no evidence to prove whether this is so or not..
Asia has, over the last 10 to 15 years, seen a major explosion in the growth of private banks and bankers. In both Singapore and Hong Kong there are probably over 2,500 front-line staff now employed in each location by private banks. Both locations now have in excess of 100 banking organisations offering private banking services. Customers for these organisations could have a net worth that ranges from around US$150,000 to US$1billion.
3. Marketing Support for Sales
When selling mutual funds in the Asian region, high levels of support are required, to enable distributors and sellers to present the products to prospective investors.
As a minimum requirement, a prospectus that provides a detailed picture of how the product is set up, details the terms and conditions of investment, and outlines the funds objectives and investment policy is an essential starting point in making funds available to the investing public. Both in Singapore and Hong Kong, the regulators have prescribed content for prospectus documents, and in both locations it will be necessary for a detailed "health warning" to be printed on the front cover of the document. In Hong Kong this document will be required to demonstrate that the product has been t approved for use by the SFC, whereas in Singapore it will be the trustee and lawyers for the fund that will "sign off" on it.
However, as most people, other than lawyers, know, a prospectus is an indigestible document rather than being riveting reading material. Thus, to enable the typical retail investor to become more fully acquainted with the investment proposition, additional literature should be made available. This can include some or all of the following:
- Take-one leaflet, for distribution through bank branch networks (Take-one???)
- Sales document (A4), that gives a simple, plain language explanation
- Past performance record
- Fund fact sheet
- Application forms
- Glossary of terms, to explain the terminology used
- Presentation slide-show for training and sales
- Manager's narrative reports, usually on a quarterly basis
- Annual and half-yearly audited and unaudited reports and accounts.
All of these will need to be bi-lingual (English/Chinese) or in Chinese, to enable the local investor to be better able to read them.
Many investors and fund distributors welcome the arrival of hedge funds to the retail and institutional markets in Asia. It can be expected that sales will be active. In a recent HK IFA survey, it was identified that around 30% of existing fund investors were likely to become buyers of hedge funds once they were made available. This will immediately mean at least 100,000 buyers, which on the basis of a minimum investment of US$15,000 each (a figure that is actually less than the average investment per fund made in the Asian markets) could result in sales exceeding US$15billion. More realistically, it is probable that sales of hedge funds will take a few years to fully develop, as acceptance of the sector rises.
It is, howeve, somewhat ironic that it is only after a period of extreme turmoil in the securities markets that hedge funds have become available, a period during which, hedge funds substantially out-performed traditional funds. Based on the usual illogical manner with which the investment business works, i.e. most retail investors buy at the top, and sell at the bottom of markets, this might also be the time to "balance" your investment portfolio by increasing holdings in traditional funds!!
This article cannot do justice to, or be a complete guide to, all aspects of selling hedge funds in the Asian region, because there are too many different issues involved. However, I have attempted to provide information that would be suitable for both experienced and inexperienced fund management organisations that might wish to enter these markets with their hedge fund products.