Hedge fund brooks no difficulties from industry regulator

Jonathan Brooke talks about the opportunities for setting up a hedge fund in Hong Kong.

"I wasn't put off setting up a hedge fund despite the bear market," says Jonathan Brooke, managing director of Brooke Capital. Brooke, along with vice president Emerald Kwai, decided to set up a hedge fund company in Hong Kong in April last year, and was registered with the SFC in October. Brooke had previously spent two years working for an absolute return fund in Hong Kong, leaving in January 2002.

Like a growing number of his industry counterparts in Hong Kong, Brooke felt that setting up his own boutique hedge fund was a natural progression. However, he decided against seeking seed capital from outside investors as he doesn't want to face the prospect of having to buy other partners out a few years down the line.

He believes his major challenge has been having confidence in his abilities to run the money well. And of course achieving sustained quality performance. The difficulties of operating a successful hedge fund are highlighted by the fact that something like 800 hedge funds closed last year.

"It's an obvious point but in the end portfolio management is all about trust," he says. "Trust has to be earned and maintained whether you're a large or small institution, because market dynamics are never static over time. You could be an enormous fund management company with teams of analysts, but if your process isn't market savvy, and the results don't come, you will lose the confidence, and in that sense the trust, of your clients.

"In many ways," he adds, "the disappointment of the MSCI benchmark culture, which worked so well in the 1990s, has given an opportunity for alternative managers to emerge. This trend is likely to continue into 2003."

The firm currently manages a relatively small amount of money. He says that once it has estabished a track record, other sources of funds should become available, such as overseas private banks.

Brooke cites location and cost as being major reasons to set up in Hong Kong. He firmly believes that Hong Kong is becoming a more attractive place to be based. The Territory's close links to China are a particular reason to be here he argues.

China is a market Brooke feels will be volatile, but over five years will be a continuing good story. Hong Kong's proximity to Taiwan is also a benefit. "It's possible to make short business trips to Shanghai or Taiwan," he comments.

Hong Kong's critical mass is also something Brooke states as a key reason to be here. He believes the supporting infrastructure to be excellent and praises the attitudes of industry participants. "People in the market like David Webb at Wellam and Scobie Ward at Wardferry were helpful in giving advice.

"In Hong Kong," he continues, "the trustees, prime brokers, and also the regulators have a positive attitude. The SFC does a thorough job, which is a good thing as it demonstrates we're in a well regulated environment. The industry wants to help a start-up."

He also adds that the regulatory process is no more difficult in Hong Kong than it would be in New York or London, but costs in Hong Kong are generally lower.

Brooke feels hedge funds are here to stay, "The simple fact is that a hedge fund aims to preserve capital in turbulent markets, while looking for absolute returns when the opportunities are there," he concludes. "This is a polar opposite to the MSCI benchmarking culture."