HSBC's Alternative Fund Services Market Review Series: Manager and investor trends in the US West Coast hedge funds market
Scott Epstein, Head of Alternative Fund Services at HSBC in San Francisco, and Jackie Tomecek, Director of Sales, outline West Coast investment trends.
HW: What is the background to your presence as fund administrators in San Francisco?
SE: We have a global presence in key financial centres and we felt it was important to be closer to our clients in terms of proximity, so we began the process of opening up here a year and a half ago - we were then operating as Bank of Bermuda Global Fund Services, which of course is now HSBC's Alternative Fund Services.
The purpose of the San Francisco office is to enable us to provide tailored local servicing support to our clients as well as leveraging our relationships in the Far East.
The market here is very "high touch", meaning that clients want a hands-on local servicing presence - there aren't many global providers with a presence on the West Coast so having an office here gives us a strong competitive advantage.
HW: What is the average size of fund launches in your region?
JT: The average size of start-up hedge fund launches on the West Coast is between USD 20-50 million.
There have been some larger start-ups as well but they tend to be few and far between at this stage. We have seen a couple of funds launch with over USD 1 billion under management.
This fall, we expect to see a number of launches at the USD 100 million level but the average still remains USD 20-50 million.
HW: Where are the larger start-ups coming from?
JT: They tend to be spin-offs from established fund managers with an established track record going their own way.
In addition to these start-ups, we are seeing established funds that are funding talented in-house managers and launching new products.
We are also seeing a lot of diversification - for example, distressed debt funds expanding into the private equity market, convertible arbitrage funds diversifying into more derivative products using swaps. We are also seeing some sector funds like technology long/short analyzing which sectors are yielding the most money and branching out into those sectors.
HW: What about the funds of hedge funds market?
JT: The number of funds of hedge funds on the West Coast is much smaller than the New York metropolitan area, where they have a concentration of these funds.
We haven't been seeing many funds of funds start-ups; currently there has not been as much activity on this front in San Francisco.
SE: To put this in perspective within the US, about 30% of our funds are funds of hedge funds but the amount of fund of hedge funds proposals that we put out in San Francisco has been less than 20% of our overall proposals.
We have witnessed a large portion of fund of hedge funds activity taking place in Seattle
HW: How strong is the investor appetite on the West Coast for start-ups?
JT: It is easier for some of the larger managers to raise money because they have a strong track record and have been given the opportunity to manage hedge fund money separately from the other portfolio managers in their previous firms.
The managers from investment banking firms with little track record of managing separate mandates have found it more difficult to raise money on the West Coast.
HW: What do you offer start-up managers?
SE: In addition, to our full range of administration services, one of things we do very well as an organisation and also on the West Coast is offer a lot of assistance to start-up managers in the form of guidance on a range of operational and fund structure issues.
HW: What is the preferred fund structure and domicile for West Coast start-ups?
SE: The trend is similar to other markets, where the Cayman Islands, Bermuda and the BVI have been the preferred domicile locations.
In terms of structure, the current trend on the West Coast is for master/feeder structures. The reason for this is some of the new deferral fee rules as well as the benefits of a master/feeder with only having to manage a single portfolio of assets - in most instances these are significant advantages to the fund manager.
At least 50% of the structures we are currently working on in the West Coast area are master/feeder structures.
HW: Does this make servicing these clients quite complex for HSBC?
SE: In fact that ties right into one of our competitive advantages locally. We are one of the largest global players, and our onshore and offshore client servicing platforms are very similar, allowing us to provide seamless front-end solutions easily to clients. In contrast, a lot of our local competitors have to partner with an offshore firm to provide the complete range of facilities.
HW: There has been a lot of concern about the SEC's proposals for registration of hedge fund managers. What are your views on these proposals?
SE: It is looking much more probable that there will be some kind of regulatory oversight on hedge funds.
It has been a long time coming in that the hedge fund industry has not previously fallen under regulatory authority in the US but with hedge funds coming into the mainstream and becoming more retail in nature, it is a natural evolution to have further oversight and regulation in place.
We expect it to be an easier transition for the larger managers, many of whom already have internal legal and compliance expertise.
HW: What trends are you seeing among institutional investors in hedge funds?
SE: As a fund administrator we offer a lot of support to our clients in terms of the new demands being placed on them by investors.
Two very specific areas are the growing demand for daily NAVs and transparency. We already have the infrastructure in place for delivering daily NAVs to large institutional investors and we also have the flexibility to allow greater reporting transparency to satisfy the growing due diligence requirements of both institutional investors and regulators.
HW: How are hedge funds reacting to the growing demand for transparency?
SE: For the most part they are responding positively. Some managers trading in complex thinly traded securities may be concerned about disclosing their positions and compromising their trading ability but the more mainstream strategy managers, and ultimately their investors, can only benefit from greater disclosure.
We are tackling these challenges by developing customised solutions to help managers get the right information to investors on a timely basis.
HW: In addition to some of the aspects previously discussed, what are your competitive advantages in the West Coast market?
SE: One of our biggest advantages is that we are now HSBC - one of the largest banks in the world. Combining our new stature with the specialist expertise of Bank of Bermuda Global Fund Services has opened new doors for us and enables us to offer a expanded product solution to our clients from treasury business, lending, structured products, etc.
HW: Looking ahead, what is your market outlook for the next six months in the West Coast?
JT: We think the current trends are going to continue with funds diversifying their portfolios to seek better returns whilst the market generally will continue to grow. In terms of pension funds, they have only started to allocate money to hedge funds in recent years and this is set to increase going forward.
In terms of regulations, the more scrutiny there is on the hedge fund industry, the more reliance there will be on administrators. Managers are going to depend on us to price their portfolios and investors will expect us to independently value their books. Based on this, we anticipate more and more US funds will have to select an independent administrator.
We are also anticipating more private equity launches and more domestic fund managers expanding internationally, and we are well placed to handle these trends with our expertise and global reach.
SE: We will ensure we that we cater to the growing demand that we are seeing here on the West Coast. We currently have 14 people in the San Francisco office and this is set to double in the next 12 months, both in terms of people and assets under administration.
We are also taking on a number of experts to build and develop our private equity offering on the West Coast with a view to having an even more robust alternative funds offering in place.
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