Chinese hedge funds pour into Hong Kong

Oriental Patron, a hedge fund incubation platform, has onboarded seven start-ups this year and expects to add eight more by end-2016. Tomorrow we feature interviews with two such firms.
Chinese hedge funds pour into Hong Kong

Chinese asset managers are lining up to put operations in Hong Kong in order to attract international clients; the city’s markets regulator is said to be flat out processing licence applications from mainland firms. 

But a number of smaller players are opting instead to join incubator-type platforms to develop a track record, as obtaining a licence from the Securities and Futures Commission is less feasible for managers with less than $50 million in AUM.

One such platform is Hong Kong’s Oriental Patron Investment Management (Opim), which onboarded seven new managers in the first half of this year, four of which are Chinese firms. It is also in talks with three more and aims to add 15 to its platform this year, including the seven already in place. Some 60-70% of the new additions are likely to be mainland players, said Alvin Fan, Opim’s chief executive.

There are five Chinese fund managers on the platform so far, whose strategies include global macro, fixed income (investing in OTC instruments, contingent convertible (Coco) bonds, preferred shares etcetera), quantitative, options trading and long/short China equities listed in Hong Kong and the US.

Fan said Opim favoured two types of mainland portfolio manager: those with experience in the US that have spent many years building their track records; and local, home-grown managers with “deep respect for risk”.

Opim is planning to allocate capital to selected managers, in partnership with two European funds of funds, and will expect returns of 8-15%. He declined to provide the names of the funds of funds because the agreement is at an early stage.

About 30 hedge funds have launched through the Opim platform, with 18 currently active (two of which are Opim’s own funds). The rest either went independent or have closed down, but Fan could not provide any names because of confidentiality agreements. 

There are two key challenges for Chinese hedge fund managers looking to launch products offshore, said Fan. One is the cost. In Hong Kong or the US, it’s widely accepted that at least $50 million in AUM is needed to break even, based on a standard 2% management fee and 20% performance fee. 

Then there is the time frame for launch. Typically it takes about six months to start a hedge fund, which may cause managers to miss the best timing to enter the market.

Managers have three structures to choose from – Ucits, stand-alone or segregated portfolio company (SPC) (see chart) – and must set up a Cayman Islands-registered company to join the Opim platform.

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The SPC structure can shorten the launch period to six weeks and allows a lower AUM threshold of about $5 million. This is the preferred approach for managers that want to launch quickly and at lower cost. 

Incubation platforms tend to provide services and infrastructure including office space, back-office technology infrastructure and compliance. They also coordinate with service providers such as offshore law firms, prime brokers, fund administrators and auditors. 

OP Financial Investment, Opim’s parent company, also runs a joint-venture fund house, CSOP, which it set up with China Southern Asset Management in 2008 and in which it holds a 24% stake. CSOP has expanded fast and has launched a number of landmark exchange-traded funds.

Opim also established the hedge fund platform in 2008, making equity investments in several small funds that wanted to copy the success of CSOP. In 2011, Opim switched from an equity-holding model to a revenue-sharing one, helping firms towards an eventual spinoff with no strings attached, Fan said.

“[Opim] management recognised this natural inclination to spinoff and eventually leave, and instead focused on providing incubator type of services to fund managers on the premise that, if these funds continued to see the benefits of a segregated model, they would stay,” Fan said.  

Tomorrow AsianInvestor will publish the second article in this series, in which two Chinese hedge fund start-ups – one of which recently joined Opim’s platform and the other is discussing doing so – will discuss their plans.

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