The hedge fund industry in Asia-Pacific has seen gradual development, with hedge fund assets in the region growing by almost 30% over 2014, according to the 2015 Preqin Global Hedge Fund Report. Economic expansion and regulatory reforms have helped intensify the hedge fund industry in this region and foster an atmosphere that is expected to bolster the industry over the longer term. Hong Kong leads the way as the hub of hedge fund activity in Asia-Pacific, hosting some of the largest hedge fund managers in the region. Here, we take a look at the hedge fund industry in Hong Kong and how its developed market structure presents opportunities for the industry to develop further in this area.
According to the Preqin Special Report: Asia-Pacific Hedge Funds, the largest proportion of hedge fund managers (38%) based in Asia-Pacific are located in Hong Kong, surpassing the proportions represented by other large financial hubs in the region, such as Singapore (23%) and Australia (15%). Furthermore, five of the top 10 largest hedge fund managers in the Asia-Pacific region are found in Hong Kong, providing further evidence of the country’s significance within the hedge fund industry. Such significance can also be attributed to Hong Kong’s status as a gateway to Chinese capital, and also to fund managers looking to invest in Chinese markets. Indeed, 72% of Hong Kong-based fund managers show a preference for investing in China, compared to 51% investing in their home country.
Another characteristic of Hong Kong’s thriving hedge fund activity is the robust, risk-adjusted performance generated by Hong Kong-based hedge funds. Preqin’s Hedge Fund Analyst shows that Hong Kong-based hedge funds have generated a year-to-date net return of 4.17% as of 31 March 2015, outperforming the Preqin All-Strategies Hedge Fund benchmark (+2.88%), Singapore-based hedge funds (+2.38%) and Australia-based hedge funds (+4.08%) for the same period. Over the longer term, Hong Kong-based hedge funds have generated a Sharpe ratio (RFR=2%) over three years of 1.4, showing their ability to deliver risk-adjusted returns to investors.
Going forward, the investment environment in Hong Kong appears to be opening up further with the introduction of the Shanghai-Hong Kong Stock Connect scheme in November 2014. The program is open to all Hong Kong and overseas investors and will allow access to a broader variety of financial assets in China. This presents an added incentive for Hong Kong-based hedge fund managers to launch their hedge funds in the tax exemption regime, making Hong Kong an attractive platform for investment opportunities. As Hong Kong dominates the hedge fund industry in Asia-Pacific, it will be interesting to see how other financial hubs in the region, such as Singapore and Australia, will be able compete with Hong Kong in attracting hedge fund activity over the longer term.