A growing number of overseas hedge funds are looking to avoid the expense of setting up Asia-based trading offices by outsourcing the function.
US-based BTIG this week launched outsource trading desk services in Asia, where it is expected to be popular among managers of equity funds and newly established funds, notes Trevor Harrison, BTIG executive director in Hong Kong. Fees are paid when a trade is executed, with no retainer costs, although fund managers need to set up a brokerage account with BTIG.
An executive from a Hong Kong-based hedge fund group managing more than $1 billion notes that outsourced trading is a trend seen in other markets, such as the US. It is regarded by the fund sector as a service that is most helpful for smaller funds which may not have the resources for an in-house trading desk.
While large US or European hedge funds can – and often do – set up small trading offices in Hong Kong or Singapore to execute Asian trades, there are some smaller managers who choose to outsource the function.
“We have clients in Australia using us as their London or New York trading desk, and have managers in New York using us as their Hong Kong trading desk,” says Harrison.
US-based Tora Trading Services in 2005 launched outsourced trading services in Asia “in tandem with significant growth in Asia-focused hedge funds”, says Brian Jepsen, head of Tora Outsourced Trading. At the time, there was a wave of Japan long/short equity fund launches, as Japanese markets were outperforming the region, he notes.
“In 2007, we had a similar scenario with an increase in Hong Kong/China focused funds with portfolio managers sitting outside the region. This trend has remained intact,” says San Francisco-based Jespen. The firm is also seeing increased interest in US-based firms that are seeking exposure to Asia, but without having to rent office space in the region, he adds.
BTIG – which launched outsource trading services in Australia 18 months ago and in the US in 2002 – has a total of 140 clients that include hedge funds, long-only funds and macro funds that outsource a part of their equity portfolio. Among alternatives strategies, fundamentally driven long/short equity hedge funds would “get the most value out it”, says Harrison.
In addition to smaller hedge funds, new boutique fund launches would find outsourced trading to be especially attractive, says Michael Langton, head of sales at Quality Risk Management and Operations in Hong Kong. The service would enable chief investment officers to “spend more time researching and then simply delegate trades to the outsourced trading desk”, he notes.
Over the past several years, major banks Morgan Stanley and Bank of America have sold their outsource trading units to respective buyers Conifer Securities and Baypoint Trading as they focused on larger hedge fund clients. BoA had noted at the time of the sale that most of its clients had their own in-house trading capability.
BTIG earlier this year added four industry veterans in Hong Kong as it grows its regional operations, which is headed by Asia-Pacific CEO Jesse Lentchner.