Sumitomo Trust & Banking (STB) has found a way to marry the skills of the bank side's proprietary traders with the ability of its trust side to create asset management products for third-party clients.

Its unit in Hong Kong, Sumitomo Trust Finance, has set up funds that combine the two functions of prop trading and asset management.

Sumitomo Trust Finance has been in Hong Kong for over 30 years as a deposit-taking entity regulated by the Hong Kong Monetary Authority. In 2004, the office began managing hedge funds for non-Japanese institutional clients. These were initially Japan market-neutral strategies developed by STB's asset management division for its pension clients seeking stable returns.

Last year, the office developed a new mission, says Kota Murakami, head of the asset management group in Hong Kong: creating alternative offshore products for Japanese clients.

It created two funds based on the prop trading skills of STB. The funds are not a mirror of what the prop traders in Tokyo do, but adopt strategies developed by them focused on credit markets. These are short-biased credit funds that invest in credit default swaps (CDSs), with one for emerging markets and one for developed countries. The idea is to create hedges against the kind of market movements that could damage a prop desk, in anticipation of a second wave of market distress.

Earlier this year, the Hong Kong office launched a new Japan long-only fund with an absolute-return mandate, hedged via futures, options or CDSs. This product represents the integration of the prop desk's trading methodology and the stock-picking skills of an institutional investor.

Now the office is applying for a type-5 licence from the Hong Kong Securities & Futures Commission that would allow it to advise on futures trading, with the aim to create managed futures products.

"It's a way to create income streams from existing prop-desk activity," Murakami explains.

The Hong Kong office remains modest in size, with its $350 million under management, compared to the $250 billion that STB manages for Japanese pension funds and other clients onshore. Sumitomo Trust Finance also focuses on Asian equities, private equity and structured products.

Murakami says there are plans to boost the office's marketing capability for non-Japanese institutional investors, hand in hand with STB.