HSBC’s Alternative Fund Services Market Review Series: Australian hedge funds feed growing appetite from wrap providers

HW: What is the background to your presence as fund administrators in Australia?

JM: HSBC’s Alternative Fund Services (formerly Bank of Bermuda’s Global Fund Services) has provided fund administration throughout the Asia Pacific region for more than 25 years.

Due to our specialist expertise on alternative fund administration, Australia has been one of our major new markets for the past five years where there has been a growth in the alternative fund sector.

We continue to focus on a very distinct market segment and our product offering, services and approach reflect this. 

HW: What is the average size of fund launches in Australia?

JM: The size of fund launches vary widely: some launch with less than USD 5 million whilst some exceed USD 200 million.  In the nascent stages of hedge fund growth in Australia the average size was around USD 1 million – 2 million but this has been increasing. 

This increase highlights both the growth of the sector generally, in response to the poor performance of the global and local equity markets, and the needs of investors to diversify portfolios to segments that have a low correlation to equities and bonds and where the focus is on absolute returns.

HW: What are the main strategies being used in Australia?

JM: Australia has a diverse range of strategies, which include single country, single sector, commodity, macro, absolute return, Japanese long short equity, and Australian long short equity.

A well-established fund of hedge fund community actively feeds the appetite from the wrap providers, which has increased significantly over the last 2 years.  The biggest players in this field are Macquarie and BT. These wrap providers are actively disseminating both single manager and fund of hedge fund products through to the retail sector of Australia, where there has been a substantial increase in demand. 

The bigger superannuation houses have a wide range of choice from the many internationally based fund of hedge fund houses that have a physical presence in Australia or who market remotely to them offering their global fund of hedge fund product amongst products available in the Americas and Europe. 

HW: Who is launching what strategies?

JM: Most new launches this year have been from managers diversifying their products to attract international investment.  These tend to be managers who had only a domestic product, which is an unattractive proposition for a non-Australian taxpayer, and they have therefore created offshore funds to attract investor interest from the international community.

Examples of this would be the offshore funds assembled from Hayberry, Affinity Capital and St Helens.  Additionally, there are products targeted to retail investors that are able to be included on the wrap facilities utilised by the IFA community.  These products have increased substantially with K2, Vertex, Rubicon and Basis Capital, all well-known providers in this field.

Australian hedge funds have generally performed well in 2004 and this has encouraged the creation of more single country funds from the market.

More regionally focused products are expected in the near term and a number of Japanese funds are due to be launched by independent boutique managers along with the big, once known as only ‘traditional’ fund management firms. 

HW: What types of fund structures are being launched?

JM:  As per the trend in the rest of the Asia Pacific region, managers are trying to attract US taxable investors and thus master feeder structures are often used.

A master feeder structure allows managers to compile a product which is attractive to an offshore investor pool, thereby widening their target investor base, as well as being able to add a feeder for an US taxable investor pool.

HW: What is investor appetite like for different strategies?

JM: With the increasing interest of institutions in hedge funds, coupled with the increased demand from the retail level. we expect growth across a broad range of strategies.  Having said that, Australian investors (institutional and retail alike) are fairly experienced and sophisticated and as such, we would expect to see increased allocations into more complex strategies particularly from high net worth individuals.

HW: What is the latest on the regulatory front?

JM: As interest in hedge funds continues to grow, and in response to the recent lowering of the investment minimum, both the government and the regulators will take an increased interest in the sector as they will want to ensure that they are protecting the interests of the investors.

HW: What is the trend among institutional investors in Australia?

JM: We expect increased demand from these investors for greater transparency and more frequent reporting of information in formats that are easy to use by both fund managers and their clients.

Regulation will also drive due diligence processes and the need for independent provision of information and greater demarcation on the actual management of the fund and the provision of performance information.

HW: What is HSBC’s advantage in the local market?

JM: HSBC has an established presence in the Australian market through its offices in Sydney and Melbourne. HSBC’s Alternative Fund Services is developing a specialised business in Australia that will leverage our knowledge, understanding and experience in the sector to provide institutional and specialist emergent managers with greater choice and global scope especially as they themselves look to expand from the domestic market and target the investment community internationally.

HW: Looking ahead, what is your market outlook for the next six months in Australia and what key trends do you think will develop?

JM:  We see continued demand particularly from large superannuations. This in turn will lead to further regulation, the development of educational forums and industry bodies and the segmentation of the industry between the entrepreneurial small and medium sized fund managers who drive Australia’s small business growth and the large institutions with their focus on the pension/superannuation sector.  There will be an interesting juxtaposition of smaller domestic business expanding internationally and large global players consolidating their position locally.