Enhanced Investment Products has turned five years old but finds its client structure has become unbalanced.

EIP manages a Hong Kong-based market-neutral arbitrage fund that was founded in 2002 by Tobias Bland, CEO and former head of Jardine FlemingÆs proprietary trading desk. It has a rare dual structure involving an index-tracking exchange-traded fund (ETF) as well as a series of single-country long/short strategies for various Asian markets. It offers investors either indexed returns or long/short exposure û or, ideally, both.

ôOur perfect investor is a portable-alpha investor that wants both pieces,ö says Bland, noting that the firm has a number of large institutional investors in the United States that invest on that basis.

Bland has a background in securities lending, which underpins the concept behind EIP: that a single-country long/short fund can borrow from the index fund in order to conduct shorts in markets where this practice is otherwise difficult or expensive. The cost of borrowing securities in some regional markets is as high as 5-6%, whereas EIPÆs long/short strategies can do so virtually for free from the sibling ETF.

ôWhy should a custodian or an investment bank take a 50% cut?ö Bland explains. Normally to borrow in order to short a market, there is a middleman extracting a hefty wodge of profits for not doing very much, in his view. So he created a structure that cuts out the intermediary.

This also ensures the indexed product outperforms its benchmark (the MSCI series of country indices) because it is accreting gains from lending out securities while otherwise tracking the index. EIPÆs enhanced index tracker provides 100% exposure to the MSCI benchmark index and 99.5% of the MSCI Emerging Asia Index (there is no Pakistan strategy). Bank of New York serves as the investment advisor in New York running the day-to-day index funds.

Combining an index return and an absolute return can be complicated and will appeal to more sophisticated investors that run portable alpha strategies. ôOur edge is that we operate in markets where shorting is difficult or expensive,ö he says. The passive strategy has consistently beaten or tied the MSCI indices, although it trades at a discount or a premium to BGIÆs iShares series of ETFs, depending on how those exchange-listed products trade.

Starting with long/short funds for Taiwan and then China and India, this year EIP added strategies for Korea, Thailand, Malaysia, Indonesia and the Philippines.

The challenge for EIP is that more investors have taken a shine to its index piece rather than its hedge fund piece. Bland says ideally there should be a ratio of five-to-one between the two, as there needs to be plenty of liquidity in the ETF to provide sufficient securities lending to the long/short strategies.

But of EIPÆs $260 million of assets under management, only about $15 million is in the hedge fund (what Bland calls the ôoverlayö strategy). Although this has certain advantages û there is plenty more securities to be lent out, which boosts the returns of the index portion û it prevents EIP from realizing its full potential.

The challenge is that institutional investors are not willing to write big tickets to a small overlay strategy; for one thing, their own risk management will stop them from owning a disproportionate share of the fund.

To this end, Bland has brought in Rory Macdiarmid from London to head up marketing for the active portion of the fund to investors outside of the United States (the firm already has a sales rep for the US market).

Macdiarmid started out in the 1980s as a commodities trader in London and Chicago, and joined Barclays Bank. He did a spell in Hong Kong at boutique brokerage Asia Equity until 1996, when he returned to the UK to join Kleinwort BensonÆs private bank and later a boutique fund house that was acquired by Dexia. He was with Dexia until March of this year, when he moved to Hong Kong.

ôWeÆre at a junction now, to break the allocation situation,ö Bland says, adding the strategy is highly scalable once it gathers enough critical mass.

ItÆs not all work and no play at EIP, however, as the firm is preparing a five-year anniversary bash at a new swishy venue in Hong Kong next month.