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Enoch Yiu

Asian investors are showing increasing interest in hedge funds because of poor returns from stock markets and traditional funds, according to Credit Suisse Private Banking.

Werner Schlossmacher, head of investment consulting for North Asia at Credit Suisse Private Banking, welcomed a Securities and Futures Commission proposal to open hedge funds to retail investors.

He said there was increasing demand for hedge-fund investments among investors in Hong Kong and elsewhere in Asia.

'Hedge funds have become a favourite investment vehicle in Asia because of poor market sentiment,' he said.

'Investors could not make money from the stock market. They could not make much money from bank deposits as interest rates are low.

'In this situation, hedge funds can offer them higher returns.'

At the end of this month, the bank will launch two investment funds - Best International Managers Growth Strategy and Balanced Strategy - which will allow investors in the region to invest in a basket of 20 hedge funds around the world. Subscription to the funds will close on July 30.

Under present rules, Credit Suisse cannot sell the funds to retail investors - only to its Asian clients who have accounts in Zurich.

The SFC announced last week it would consult the market on whether to allow retail investors to trade in hedge funds, saying it considered there was an appetite for these products.

At present, only professional investors - such as brokers, fund managers and insurers - can invest in the US$1.5 billion Hong Kong hedge-fund market.

In Asia as a whole, hedge funds have assets of US$12 billion, about 3 per cent of the global total.

The number of hedge funds has increased more than 10 times in the past decade, from 300 in 1990 to about 4,000, with combined assets of about US$500 billion today.

Since the first hedge fund was launched in 1949, they have mainly traded in the United States market. But the products became very popular in Europe about five years ago. 'Now, they are coming to Asia,' Mr Schlossmacher said.

Regional stock markets had fallen along with the US and European markets, he said. The benchmark Hang Seng Index fell 11 per cent in the first four months this year, while local pension funds have dropped about 9.5 per cent year-to-date.

Hedge funds employ trading strategies that enable them to make money in falling, as well as rising, markets.

Thomas Meier, chief executive of Credit Suisse Private Banking's Hong Kong office, said traditional fund products had failed to bring a good return to investors during the present poor market sentiment because of their conservative investment approach.

For example, most traditional funds only tracked an index or benchmark, seldom using short-selling or derivative trading strategies to increase profits.

'When the Nasdaq was falling, hedge funds could still make a profit by short-selling the stocks,' he said.

Unlike traditional funds, hedge funds use leverage to raise returns and may use high-risk trading strategies.

Such portfolios may not be suitable for all investors, so the SFC plans to open hedge funds only to sophisticated investors who can pay high minimum transaction levels.

Mr Schlossmacher admitted that even experienced investors might find it difficult to invest in hedge funds directly. This was because they used complicated investment strategies, which were difficult to understand and assess.

Banks thus provided products which provided exposure to a basket of hedge funds with different investment strategies.

In 1998, the highly leveraged giant US hedge fund Long Term Capital Management came close to collapse, nearly triggering a global financial crisis. It was saved with a US$3.75 billion bailout by a consortium of international banks.



Credit Suisse welcomes watchdog's announcement of talks on offering high-risk option to retail investment