HSBC Private Bank sees the liquid alternatives space as growing in importance, said head Asia gatekeeper Henry Lee in an interview with AsianInvestor about how the firm goes about product selection*.
A key component of the bank's approach to alternatives is determining how much liquidity investors require, he noted, following his recent promotion to head of mutual funds and discretionary for Asia Pacific.
“That’s why the liquid alternative space is becoming more pertinent,” added Lee, who runs the team that selects long-only and alternative products.
Liquid alternatives are typically hedge fund, private equity, real estate and infrastructure investments offered in structures that comply with the US’s 40 Act or Europe’s Ucits requirements.
Hence they have tighter conditions around how they are managed than typical alternative products.
Private banks in Asia are growing more interested in these products as they look to add alternatives to their wealth management platforms. For example, Bank of Singapore is also increasingly looking at such offerings, as reported.
However, sceptics argue that the trade-off between the liquidity and access provided by such products and the they offer is a bad one.
But Lee noted that high-net-worth investors are more willing to analyse liquid alternative funds, especially those under the Ucits framework, than more traditional alternatives. Taking away the illiquidity obstacle means investors are free to consider a product’s risk/return profile, he added.
Lee declined to reveal how much HSBC Private Bank’s alternative business manages in Asia, but he said the bank’s alternative investment division manages $25 billion globally.
The private bank managed $380 billion globally as of September 30, of which Asia comprised $112 billion.
HSBC PB has 150 alternative funds globally on its platform, of which 30 are offered to clients in Asia. The bank has 80 long-only funds on its platform in Asia.
As to how its selects products, Lee said the bank is agnostic in terms of asset class and strategy.
The firm employs a range of proprietary quantitative factors to map out the consistency of the risk/return profile of the funds it is selecting, he said. It scores the funds based on 50 variables, which provides a baseline for determining those that are best in class.
A key component of the selection process is determining how risk is managed, and consistency is critical, he added.
“The more predictable something can be, the better it is for our investor base, especially if we’re working in a strategic asset allocation framework,” he said.
The length of time it takes to select a fund depends on how cooperative the manager is, Lee noted.
“For hedge funds, we want to understand the quality of returns, and to do that you have to have the cooperation of the fund house.
“We want to see fund data that exhibit consistency, not just month-to-month, but across positions.” If that information is forthcoming, the selection process can take as little as a month.
The private bank reviews its manager and fund rosters every month. In addition, each time a fund performs below the benchmark, it is effectively reviewed. The analyst has to justify why it should remain on the list.
* A full Q&A interview with Henry Lee appears in the forthcoming (December) issue of AsianInvestor magazine.