Is Hong Kong the Cayman Islands of Asia? – February 2014

by Marian Rajanathan

  • 25 Feb 2014
  • HF

The financial markets in Asia-Pacific have grown rapidly in the last few years as investment capital has continued flowing rapidly into the region. Some governments in the region are keen to take advantage of the opportunity and introduced a slew of regulatory measures to boost the growth of the finance industry.

As a result of various measures such as tax exemptions, Hong Kong has grown rapidly as a key hedge fund hub in the region. Preqin’s Hedge Fund Analyst online service reveals that 37% of Asia-Pacific -based hedge fund managers are registered in Hong Kong, ahead of 25% and 16% in Singapore and Australia respectively. Hong Kong is often referred to as the gateway to mainland China, and this is one reason for the boom of hedge fund managers in Hong Kong. The vast majority (81%) of hedge fund managers based in Hong Kong invest in China; 60% invest in Hong Kong itself and 30% invest in Japan. Managers in the region typically favour long/short strategies, with long/short equity (utilized by 67% of managers) and long bias (20%) being the most common investment strategies.

Hong Kong-based funds are well placed to attract capital from Asia-Pacific-based institutions. Preqin’s Hedge Fund Investor Profiles online service shows that Asia-Pacific hedge fund investors prefer to invest in their home region, with 76% of investors indicating a preference for investing in Asia-Pacific.

Hong Kong-based hedge funds have also been performing strongly, compared to their global peers. Preqin’s hedge fund performance data shows that over the last five years, Hong Kong-based managers have seen performance gains of 104.83% compared to Asia-Pacific (ex-Hong Kong) managers which have seen an average performance gain of 77.94%. Managers based in Hong Kong have also outperformed their global peers in the past six months, bringing in returns of 7.39% as compared to the 5.07% global average (as of 31 January 2014).

As Hong Kong grows rapidly into a hedge fund hub, many investors within Asia-Pacific are starting to look away from the typical hedge funds that are managed by larger firms and are starting to look at the opportunities presented by these start-up fund managers. Recent high profile launches in the region include Headland Investment Fund and Symmetry Investment Management Fund, both of which are set to be launched in early 2014. Forty-three percent of investors based in the region will consider seeding opportunities while a higher percentage of investors are open to investing with spin-off teams (60%) and emerging managers (63%).

As Hong Kong continues to grow as a dynamic player in the Asia-Pacific hedge fund industry, opportunities prosper for the various participants in the asset class. Potential beneficiaries of this growth in Hong Kong include established banks and professional service providers such as prime brokers, administrators, auditors and markets. As a result, firms in the industry should be taking note of developments in Hong Kong in order to take advantage of these opportunities.

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