Laying to rest much industry speculation, the Hong Kong Jockey Club has confirmed that it will invest about $100 million in funds of hedge funds in early May. Two US-based funds will receive the allocations following a due diligence exercise lasting more than nine months.
The move is a bold but well overdue step into the world of alternative investments for the habitually conservative Jockey Club. It is expected that other plan sponsors in Hong Kong and surrounding Asian countries will now follow its lead.
Club treasurer, Jacob Tsang, says: "We have mandated two US-based dedicated funds of funds managers and, subject to final documentation, fund injection is expected to take place in early May." He declined to name the specific funds.
The exhaustive selection process began last year and culminated in a visit to the US to interview prospective funds. Tsang and his colleagues used consultants Watson Wyatt to set investment objectives, advise on the drafting of an RFP, evaluate the responses and recommend suitable candidates.
"The Jockey Club's criteria were fairly stringent," comments one executive from a locally managed fund of hedge funds. "They wanted a 10-year track record which most funds of funds managers just don't have. This is why they flew to the US to interview candidates. It was also the first time that having a local presence in Hong Kong didn't carry any weight with them."
While the investment is seen as an asset diversification play rather than a geographic diversification play, the eventual selection of two US-based funds shows an indifference to local managers. "It is good that the club has finally decided to set the trend by investing in hedge funds, but it is disappointing that they didn't support the local industry," says an executive at a prime brokerage house in Hong Kong.
Tsang says a lengthy track record was important in the selection process, but the 10-year rule was not rigidly adhered to. "Both firms that we have chosen are specialists in funds of funds and were established in the early 90s. However, the average experience of the investment professionals in the industry is over 10 years for both firms."
He says funds were also evaluated based on their investment philosophy, manager selection and monitoring processes, risk management and transparency, performance and business plan.
Local fund managers who missed the cut say the disclosure requirements set by the Club were excessive, requiring the funds to give details of all matters covered during monthly investment committee meetings and all internal reports issued by their constituent managers.
Tsang declined to reveal the exact disclosure requirements which he labeled as privileged to the "negotiated deal" , but says in general the club has asked for monthly performance data and ratios, asset allocation by strategy, allocation by manager and their respective contribution, leveraged position of the manager on a portfolio basis and the manager's top five to 10 positions.
He says the club chose the fund of funds structure because it offered the best exposure to a wide range of alternative investment styles and strategies. "It can also provide a more transparent and liquid platform than direct hedge fund investment and help to relieve the investor of the arduous task of due diligence and fund selection."
The Jockey Club is known to have been a tough negotiator on the fee front. "As you might expect, they wanted us to discount our fees quite heavily. Japanese pension plans are quite happy to pay the usual 20% plus performance fee that hedge funds and funds of funds charge, but not the Jockey Club," says the local fund of funds manager.
Tsang says the Jockey Club has no immediate plans to increase its exposure to alternative investments beyond this initial injection. "It all depends on our experience going forward," he says.