Hong Kong On The Verge Of Relaxing Hedge Fund Marketing

by Mary Swire, Tax-News.com, Hong Kong

12 March 2002

Hong Kong is trying to persuade hedge fund managers to set up shop in the city four years after blaming them for an attack on the territory's currency during the Asian financial crisis, reports Bloomberg. Financial Secretary Antony Leung, struggling with a HK$65.6 billion ($8.4 billion) budget deficit, said the city needs the hedge funds in order to become Asia's pre-eminent financial center. "We would like the hedge funds to be located in Hong Kong," Leung said in an interview. "We are doing things both on the legislation and the regulatory side. More importantly our market provides more liquidity for hedge funds to operate."

The SAR's Securities and Futures Commission, however, has been making heavy weather of a decision to relax local hedge fund marketing restrictions, having already missed two deadlines for issuing new rules, and the Monetary Authority of Singapore beat Hong Kong last year in opening up hedge funds to the public by setting out guidelines on their promotion.

Some firms are not waiting for the outcome of the Government's protracted deliberations on the issue to make their plans. Massimo Tosato, Schroders' retail group managing director said that two of the firm's hedge funds, SAIF Blue Star and SAIF Blue Sea, would be made publicly available once the Securities and Futures Commission (SFC) lifted a restriction preventing local retail investors from purchasing hedge funds.

Mr Tosato said that in his opinion retail investors should be restricted to investing in so-called 'fund of funds', of which Blue Star and Blue Sea were classified among, that invest in a basket of hedge funds to diversify risk. 'I would be a little bit disturbed if a lawyer or a doctor with no investment knowledge would pick at random the best hedge fund that he has heard of - that might not necessarily be the right one for his investment objectives.'

Hailing hedge funds as 'a product of the future', as opposed to guaranteed funds which saw strong demand last year amid a contracting economy, Mr Tosato was upbeat on their retail potential in Hong Kong, saying: 'We already have very good signals of positive demand from our partners in the distribution channels.'

Both funds are already available locally to professional and private investors with a minimum investment set at US$50,000. A spokeswoman for the firm said it had not been decided yet whether this standard would be extended to the general public.

A recent survey of Hong Kong Investment Fund Association members showed 39% supported a minimum transaction size to ensure that only more sophisticated investors could invest in hedge funds, with only 20% saying there should be no restriction. Mr Tosato expects the SFC will announce a minimum transaction level higher than that imposed by Singapore, thus restricting investment to those with high net worth, but does not believe the level will be able to keep out investors with little knowledge of hedge funds.

'It's along the right principles, but it's not just the level of wealth that determines investment capability . . . you might have small investors that are very knowledgable and large investors that are not,' he said.

The Blue Sea fund aims to provide an absolute return of about 6% to 9% above US dollar cash with a low correlation to traditional equity and fixed income benchmarks. Blue Star aims to produce returns in line with global equity indices with limited correlation to, and lower risk than, listed markets.

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