HSBC hungers for hedge funds, with strongest appetite in Asia

The flexibility of hedge funds to navigate prevailing volatility has led HSBC’s private banking unit to be more bullish on them than no any other asset class, and despite the modest 1.5% industry returns so far this year.

Meanwhile, the bank’s alternative investments unit is hunting for Asian hedge fund managers, after already making sizeable allocations to two.

Willem Sels, HSBC Private Bank’s UK head of investment strategy, said hedge managers should perform well amid continuing volatility, and as potential for gains in mainstream risk asset classes are hampered by “recent slowdowns in growth combined with high inflation”.

In mid-June, HSBC’s private bank unit cut its hunger for equities, commodities and high yield bonds, leaving hedge funds its highest overweight.

“They should continue to help limit portfolio volatility, whilst also being well placed to take advantage of this volatility,” Sels said.

Tim Gascoigne (pictured), global head of portfolio management at HSBC Alternative Investments, dubbed the industry’s returns in 2011 “encouraging”.

His unit’s $2.5bn flagship HSBC GH fund flagship recently increased its Asian exposure from 10% to 15% through allocations to Ortus Capital, and Azentus Capital, the event-driven strategy of former Goldman Sachs trader Morgan Sze.

Gascoigne said: “We are also looking at hedge fund strategies that can take advantage of the broadening opportunity set across emerging markets, which we believe should prove attractive returns.

“We are increasing our Asian exposure, reflecting the deepening pool of talent and in that region and our continued focus on the emerging markets.”

Asia ex-Japan hedge funds are up 0.3% this year, according to Eurekahedge. Of eight sub-strategies focused on that region, only multi-strategy and relative value are down, by 0.44% and 2.21% respectively. Asia event-driven is up 9.17%.

Gascoigne also highlighted global macro as a beneficiary of global ‘shock events’ and geopolitical concerns that he expects to continue. Global macro made 0.4% this year, Eurekahedge said.

Gascoigne explained major reversals in currencies and commodities since mid-April had hit systematic strategies, which alongside global macro are often considered better shelters from turbulent markets than other hedge styles.

Systematic funds fell 0.24% this year to May, according to BarclayHedge, and Gascoigne expects continuing volatility to “weigh on this strategy’s return potential”.

His unit prefers equity long/short, which made 1.8% this year to May, according to Eurekahedge.

“The clear mismatch between higher and lower quality stocks caused by the unusually high correlation in 2010 – when markets focused on macro views rather than company fundamentals – has created an excellent opportunity set for managers,” Gascoigne said.

He noted M&A activity picked up, though spreads are “starting to look tight and often require uncomfortably high levels of leverage to extract meaningful returns”.

Share buy-backs, restructurings and spin-offs now provide better risk-adjusted returns for event-driven managers, he said.

“Looking forward, we believe that distressed market strategies may become more attractive thanks to a second wave of defaults in mid-market companies financed solely through bank loans, and thus hidden from the headline default rates.

“European banks have yet to shed their higher risk-weighted assets and, if the advent of Basel III catalyses this, we believe it could lead to a broad opportunity set for some managers.”

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