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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.
Summary
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!!
Author's Note
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.
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