US-based AQR Capital Management, which has just opened a sales office in Hong Kong, plans to target China and Japan above all, and is considering whether and how to build an onshore presence in the former country.
Sovereign wealth funds account for the bulk of the quantitative asset manager's client assets in Asia, but it will now increasingly target pension funds, insurers and private wealth in the region.
AQR relocated Matei Mihalca from its headquarters in Greenwich, Connecticut to Hong Kong this month to lead the Asia business, supported by a junior staff member.
Gregor Andrade, principal and head of AQR’s international team, said: “We have been taking a deliberate and measured approach to expanding our geographical footprint. We set up an office in Australia 11 years ago and in London five years ago.
“We decided that Asia was our next priority,” he added. “It was clear that to do a good job in Asia we had to be here. We could not continue the fly-in-and-fly-out model.”
AQR had already been working with a few large sovereign entities in the region, in countries such as China, Korea, Japan and Singapore. Having an office in Hong Kong will allow it to more easily go after pension plans and insurance firms in Asia, as well as wealthy individuals via family offices and private banks, said Andrade.
Research and portfolio management have remained centralised at headquarters. Andrade declined to say whether the firm would set up an investment team in the region at some point.
“The model we are now pursuing in Asia is the same as the one we are using in London and Australia, which is to open a local office focused on sales and client service,” he said.
Asked about further expanding its geographical footprint in Asia, Andrade said two markets offer the most business opportunities: China and Japan.
In the latter, he said institutions were increasingly moving into equity and alternatives, which are its two main businesses. “There is an expectation for intense servicing and for the local language,” added Andrade. We may consider adding a dedicated resource to serve Japan if we start getting significant traction there.”
China offers huge business opportunities, but the challenge is that the regulations are changing, he noted.
Andrade said AQR hadn't decided which business model to pursue if it were to go into China and declined to comment on whether it had an inclination to apply for a qualified domestic limited partnership (QDLP) licence – which allows foreign managers to raise renminbi in China to invest in offshore alternative assets – or set up a wholly foreign-owned enterprise (WFOE).
AQR is open to all possibilities in China, whether setting up a joint venture or an office, depending on regulations around how products are to be distributed, he added.
The firm trades Hong Kong-listed stocks as part of a global portfolio, but “with a little fine-tuning”, it could run stand-alone Chinese equity portfolios. he said. “It just becomes a question under which business model those can be offered.”
AQR has a mutual funds business in the US and runs Luxembourg Ucits products, but it has no plans to enter the mass-retail funds business in Asia.
In respect of Britain’s vote to leave the European Union, Andrade said the firm’s approach was the same as it would be to any market event that is one-off and unprecedented.
"Quant management is all about identifying repeatable historical events based on empirical data,” said Andrade, and markets will continue to be volatile following the outcome of the June 23 referendum.
AQR’s focus has been on risk management rather than making directional calls, he added, as volatility crept upwards in many markets in the weeks preceding the Brexit vote.
Andrade said the firm hadn’t seen any slowdown in interest in, or any outflows from, its investment strategies. AQR’s clients are uncertain whether to make permanent changes to their portfolios in light of the vote, he noted. “As always, we are focused on emphasising the importance of diversification.”
AQR declined to provide performance data on its investment strategies for the period since Brexit, nor historical figures over one, three and five years.
Based on performance data from Hedge Fund Research, the global hedge fund industry overall posted a slight gain in June despite the massive dislocations across currency, equity, fixed income and commodity markets around the Brexit news.
The HFRI Fund Weighted Composite gained 0.83% for the month, bringing it to 1.63% in the first half of the year. Gains were led by macro strategies, while relative value also turned in positive performance. But event-driven and equity hedge were negative for the month.