Private banks in Asia will need to change their approach to serving the high-net-worth segment in the post-crisis era, according to fund-of-hedge-fund executives.
Once a vital distribution channel for fund of hedge funds, private banks have lost the confidence of HNW individuals and are now used as a conduit to sell the banks’ own products, according to FoHF panellists at the Fund Forum Asia event in Hong Kong last week.
Prior to the crisis, private bank channels had an “open architecture” for fund distribution, notes Daniel Ghirardi, Asia-Pacific chief executive for Swiss-based Syz Group. The firm’s business spans private banking, asset management and investment funds.
“Now a lot of the private banks are also asset managers at the same time,” adds Ghirardi. “It’s a very semi-open architecture so there’s less room for other products to get in. They’re also pushing their own funds because the revenues are much higher from that.”
Syz’s product range includes fund of hedge funds, including the Oyster Multi-Strategy Fund which was recently merged with a closed China FoHF strategy.
Ed Rogers, chief executive of Rogers Investment, a Tokyo-based hedge fund adviser, says that private banks have been left “permanently impaired” by the Bernard Madoff scandal. The crisis revealed the fact that the US manager was not running a hedge fund, but a multi-billion-dollar ponzi scheme.
A number of private banks had recommended Madoff’s fund to clients, who subsequently “were ripped off,” says Rogers.
“High-net-worth individuals are used to risk and they’re used to losing money. They were really not happy in just getting ripped off,” adds Rogers. “We speak to a significant number of high-net-worth individuals and they haven’t forgotten.”
The panellists observe that HNWs now have multiple accounts at different private banks – instead of just one, as in the past – and are more wary of them.
“In fact we’re seeing some of them leave private banks,” says Max Gottschalk, head of Asia at Gottex Fund Management.
Their standpoint could benefit boutique fund managers which emphasise a focus on due diligence, according to Rogers.
“A mere modicum of due diligence would have exposed Madoff as a fraud,” says Rogers. “We saw [during the crisis] in the alternatives space, many private bank vehicles were really just sales vehicles, they weren’t product due diligence vehicles.”
Rogers adds that private banks “have to find a better way to add value and ... gain client trust”.
Panellists acknowledge that the FoHF sector had also left HNW investors displeased by gating fund redemptions during the crisis, with some delivering below-benchmark returns.
“Many of them have been disenchanted by hedge funds because they were sold to them by their private bankers as an absolute-return product, with very little understanding of what they were buying,” says Gottschalk.
Since the crisis, FoHFs have supplanted their primary asset base of high-net-worth investors with institutional money, although some remain invested in the asset class, say panel members.
Bull market activity this year has led panellists to be optimistic that this year could mark a return to Asian hedge funds by HNW investors.
“The single most important trends we see in our high-net-worth client base, which is primarily American for our business, is a renewed interest in Asia and a willingness to take risk,” says Rogers.
Notes Gottschalk: “I think we will see far much stronger performance coming from hedge fund portfolios and performance ultimately drives demand.”