Pioneer to enter retail hedge fund market

With Hong Kong capital-guaranteed funds maturing, will investors consider an alternative strategy?

Pioneer Investments is considering entering Hong Kong's nascent retail hedge fund market, says Edmund Lacis, Asian head of sales and distribution. The firm will submit an application to offer retail investors a multi-strategy, multi-manager fund of hedge funds product to the SFC by the end of March and hopes to gain approval during the second quarter of this year.

"With the current low interest rate environment and with retail investors entering this asset class for the first time, we feel that a fund which offers about half the volatility of bonds and consistent equity-like returns will be attractive to retail investors," says Lacis.

The primary objective of the fund will be to limit volatility and minimize the number of draw down months to ensure investors experience a constant return. Investors could expect to double their money within seven to eight years, he claims. Pioneer is considering attaching a guarantee to the fund, although Lacis notes that it is unclear whether guaranteeing the product is worth the costs involved.

Although some have been disappointed by the subdued reception retail hedge funds have received since they were legalised by the SFC in May 2002, Lacis says he is not surprised: "I never expected to see an immediate boom. This is a new asset class for retail investors and it will take time for it to be widely accepted. I will be pleased if Pioneer's retail fund raised between $50-60 million within a year of its launch."

According to Lacis approximately $1 billion of guaranteed products are due to mature in Hong Kong this year. He believes retail hedge funds will be a viable alternative for these investors looking for attractive capital preserving investments.

However, tailoring the right product for the retail hedge fund market is only half the work. Lacis emphasises that distribution and communication with retail clients will be key to the fund's success. Pioneer intends to partner with one or two commercial banks in order to market its fund through their distribution networks.

"We've had discussion with commercial banks, which have not developed their own retail hedge fund capability, as well with those which have their own funds but are operating an open platform," says Lacis.

Pioneer plans to provide ample support to the commercial banks to help them educate their staff and retail clients. "In particular we need to clear the misconception that all hedge funds are the same and explain the differing risk-return profile to investors."

Lacis believes the lacklustre demand for hedge funds reflects commercial banks' wariness of pushing them, out of fear investors won't understand what they're buying and complain.

Should Pioneer receive SFC authorization, it will join HSBC, JF Funds, Citi-Permal, SG and Invesco, which between them have eight existing retail funds in Hong Kong. Lacis estimates the market size is currently about $125 million.

He expects to see three or four new retail funds launched this year, with an additional two or three new players receiving approval to operate in the retail space. It is rumoured that Man Investments and GAM are among those seeking authorization to launch retail hedge fund products.