Man readies retail hedge fund for Hong Kong

The hedge fund behemoth believes investors want products to deliver higher returns than is currently on offer.

Man Investments, the world's largest hedge fund manager,with just under $40 billion of assets, is preparing to launch its first authorised retail hedge fund product in Hong Kong under the new regulations put forward by the Securities and Futures Commission in May 2002.

Man's Asia Pacific regional manager Matt Dillon says the product will be a diversified fund of hedge funds and is due to launch in the third quarter of this year.

"The retail hedge fund market has had a slow start because the products on offer weren't really what investors in Hong Kong are looking for. Most of the products offer low volatility with low returns," says Dillon. "Our sense is that Hong Kong investors have an appetite for higher returns and are looking to diversify away from the stock market. We think they can tolerate the slightly higher volatility associated with this, and our new product will reflect this."

Although this will be Man's first product to be authorised under the new guidelines, Man is an old hand in Hong Kong's retail hedge market. Its AHL Diversified Futures fund, launched in 1998, has raised over $500 million in cumulative subscriptions.

Dillon says the minimum subscription for the new product will be $20,000, putting it higher than the minimum set up by the SFC for fund of hedge funds of $10,000 and lower than the $30,000 minimum for the AHL diversified futures fund.

Dillon says he has been spending much of his time lining up distributors. "Traditionally our relationships have been with private banks and IFA's, but we've been working on our relationships with the retail banks as well, and have formed alliances with Standard Chartered and Bank of America, which we expect to be some of our key distributors for the new retail fund."

Dillon says he expects strong interest for the new retail fund to come from the private banking side as well.

"Although the private banks have a suite of Man products to offer clients, this product is attractive because of its diversified nature, compared to the more strategy-specific nature of the other products we offer," he comments. "This type of fund will be particularly attractive to first-time hedge fund investors."

Jeremy Lam, partner at law firm Deacons, which has advised on the applications of eight of the 12 retail hedge funds authorised in Hong Kong, says investor education is the major issue facing the growth of the industry. "Many potential investors in Hong Kong are still focused on trading for themselves," he states." The message that they should have confidence in a professional manager who can provide them with steady returns has still not gotten across."

Industry participants have complained that the SFC's criteria for authorising hedge funds has been too stringent and slowed down the growth of the industry.

Lam says the SFC should be given credit for being one of the first regulators in the world to allow hedge funds to be sold to retail investors.

However, he notes that some managers have had difficulties complying with certain provisions such as the requirement that the fund have at least two investment executives with five years of hedge fund experience. Another is the requirement that the manager and investment advisor be licensed in an acceptable investment regime.

"This has been one of the key issues for those looking to authorise as some inspection regimes, such as the Cayman Islands, are not approved by the SFC," Lam says.

Dillon gives the example of one of Man's managers, RMF. Despite the fact that it is one of the world's biggest fund of hedge funds, it cannot get a product authorised in Hong Kong under current regulations as it is not licensed in an acceptable investment regime.

"Another issue is with performance fees," says Lam. "The industry standard is to have these paid monthly or quarterly to the fund, whereas the SFC rules require this to be paid annually."

Lam notes that these regulations have caused difficulties for those looking to authorise existing funds. "Some of the big providers have shied away from launching retail products in Hong Kong because they cannot authorise an existing product and the Hong Kong market is not big enough to warrant creating a new product from scratch," he argues.

Lam says the SFC is aware of these concerns. "The SFC has indicated that it will consult the industry towards the end of the year and this may lead to some amendments," he concludes. "It will need to balance its duty as a regulator concerned with protecting investors with provisions that allow the growth of the industry."

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