Bank of China International (BoCI) aims to ramp up its prime brokerage business and is targeting Chinese hedge fund start-ups in its drive to become a fully fledged investment bank.

Graham Ng, deputy head of equity sales and research at BoCI Securities, says the firm’s prime servicing unit has prioritised developing relationships with managers of Chinese hedge funds up to $100 million in size.

He notes that BoCI is looking to leverage existing clients from its private banking and investment banking divisions and to channel this potential investor capital into the hedge funds it serves.

“[Mutual] fund managers already have wide distribution channels comprising commercial and retail banks,” says Ng. “But for start-up Chinese hedge funds targeting money from offshore Chinese investors, their needs are often not met by bulge bracket investment bank’s prime financing [business] and this is where we feel we have a niche.”

Already BoCI has been servicing Chinese hedge fund managers by providing standalone execution services or margin financing as they trade Hong Kong-listed stocks.

But this year the firm has moved to formalise the structure of its prime services division. It now has four components: securities borrowing and lending; margin financing; execution and trading; and hedge fund custody.

“We conduct our own due diligence on Chinese hedge funds to ensure their risk management, governance and internal set-up satisfy our requirements before we would put them onto our authorised list of hedge fund managers to be recommended to our own private banking or high-net-worth clients,” says Ng.

He notes that Chinese hedge funds typically run long-short strategies focused on A-shares, H-shares and American depositary receipts. The managers tend to have returned to China after education overseas to seed a fund themselves, or via friends and onshore/offshore contacts.

BoCI views prime brokerage as an extension of its securities brokerage unit, where it has been offering sec lending and margin financing for years.

Ng sees potential for BoCI’s private banking clients, with a minimum $3 million in net worth, to invest in hedge fund start-ups, and his team has been organising events to bring the two sets of clients together.

Shi Lin, CIO of long/short fund Yong Rong Asset Management based in Beijing, is one of BoCI’s few prime brokerage clients at present.

Set up this year with $30 million, it operates in China under the structure of a trust – a form of private equity fund trading in the secondary market known locally as “Sunshine private funds”. 

Shi says Yong Rong invests 80% of the fund’s assets offshore, with the remaining 20% invested in China A-shares. 

While Yong Rong currently uses BoCI’s execution services, it does not employ leverage in its strategy. With its operations in China set up in May and Hong Kong in July, Shi says he expects the fund to achieve 30% annualised return.

Having worked in the China offices of foreign hedge funds such as Hill Capital and Greenwoods, Shi has been analysing the Hong Kong market since 2005. Yong Rong uses bottom-up analysis and focuses on natural resources, technology, media and telecom, consumer and industry sectors.

“While others focus on keeping volatility low, we focus on capping permanent capital losses, which we consider the biggest source of risk for our fund,” Shi says. “We invest in stocks that exhibit the greatest price movement from changes in the industry, economic cycles, technological trends, etcetera.”