Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening.
Speaker: And now onto today's show.
Speaker: For professional clients only.
Speaker: Any views expressed were held at the time of preparation and are subject to change without notice.
Speaker: There is no guarantee that HSBC asset management will successfully pick out performing managers.
Speaker: Past performance does not predict future returns.
Speaker: Diversification does not ensure a profit or protect against loss.
Speaker: Hi, my name is Terry Minke, Head of Sales Origination for Prime Finance in APAC.
Speaker: I'm also the Head of Capital Intelligence.
Speaker: Today, we're joined by William Benjamin, Global Head of Indirect Investments at HSBC Asset Management.
Speaker: William leads all the investment teams focused on alternative strategies deployed via third-party managers across liquid strategies, hedge funds, private debt, and private equity.
Speaker: Today, he joins me to discuss HSBC's investment strategy into hedge funds, how allocations have changed over time, and also the benefits of having hedge funds in one's alternative's investment portfolio.
Speaker: Will, hello, welcome.
Speaker: It is a pleasure speaking with you today.
Speaker: Hi, Terry.
Speaker: Thanks for having me.
Speaker: Will, to kick things off, for our listeners who do not know HSBC Asset Management that well, can you please tell us a little bit about HSBC's hedge fund allocation strategy?
Speaker: Sure.
Speaker: The Alternatives Investment Business at HSBC started in 1989, initially as an advisory business.
Speaker: We launched our flagship fund of hedge funds, HSBCGH Fund, in 1996.
Speaker: This fund has annualized 7.2% since inception, with an annualized volatility of 5.4%.
Speaker: That's as of the end of January this year, 2024.
Speaker: Today, we manage just over 23 billion in AUM across commingled discretionary and advisory mandates for high net worth and institutional clients, which puts us in the top six largest hedge fund investors globally.
Speaker: We have 30 investment professionals located across the US, Europe and Asia.
Speaker: Our analysts are based where their hedge funds are based and our portfolio management teams also have a global footprint.
Speaker: The HSBCGH fund aims to achieve a cash plus 5% annualized return by strategically tapping into diversified sources of alpha across a range of hedge fund strategies.
Speaker: The fund is intentionally designed to give a near zero beta with traditional markets, thereby minimizing its exposure to market fluctuations.
Speaker: Its volatility profile aligns closely with that of a fixed income investment.
Speaker: Alternative investments have always been viewed as complementary to our internal capabilities as a way to get the exposure and diversification into areas where we do not have the capability internally.
Speaker: This is why, for now, it will continue to remain an external programme.
Speaker: Thanks for that, Will.
Speaker: And how has your allocation model changed, if at all, in the past few years?
Speaker: It has evolved with the industry, although the fundamentals of our construction process remain similar.
Speaker: We are focused on diversification and try to invest in the best strategies and funds across all strategies rather than focusing on a single strategy.
Speaker: This allows us and our clients to weather macro and market cycles.
Speaker: As we develop our business further, we've been doing more in onshore China and India.
Speaker: In China, we've been leveraging our research platform with a selection of a number of leading hedge funds that have quoted to market in China.
Speaker: In India, our due diligence teams have sourced a number of domestic hedge fund solutions.
Speaker: With the higher rate environment that we are now in, how have investor expectations shifted?
Speaker: As an investor, we expect higher returns from hedge funds as rates have risen.
Speaker: Some strategies obviously perform better in a higher rate environment, e.g.
Speaker: higher cash rates provide a performance tailwind for hedge fund performance for managed futures and equity market mutual strategies in particular.
Speaker: In higher rate environments, we also note that equity and credit long short strategies have more opportunities on both sides of the book, given higher levels of dispersion in markets.
Speaker: There has been a lot of media attention on the competition stemming from multi-manager, multi-strategy hedge funds in the past few years.
Speaker: Do you still find this model attractive and why?
Speaker: Yes, we do.
Speaker: But like every strategy, there are winners and losers.
Speaker: Some managers implement the model well and others less well.
Speaker: We're focused on identifying those who we think will be the best throughout cycles and allocate to this select group of names.
Speaker: From the manager's perspective, it's a complex strategy to implement and requires substantial resources to do it well, with not many groups resourced to be successful.
Speaker: In the light of the private equity and credit boom over the past few years, how do you see hedge funds fitting into the multi-asset portfolio?
Speaker: And why are hedge funds still an attractive investment option for investors?
Speaker: Private equity and private credit are fundamentally long asset classes in equities and credit seeking to enhance returns.
Speaker: Within the hedge fund space, you can short these asset classes and allocate to a number of opportunities and exposures which you can't do in these private strategies.
Speaker: These strategies aren't just seeking to enhance return, but also lower risk across portfolios.
Speaker: We believe 2024 presents itself as a conducive environment for investors to allocate to hedge funds.
Speaker: Investors in traditional markets are facing ongoing volatility underpinned by positive correlations between equity and fixed income markets.
Speaker: Hedge funds typically have been able to extract returns from other sources, geopolitical and asset class uncertainty, corporate activity, asset class trends and arbitrage opportunities.
Speaker: They are also more liquid than typical private market funds.
Speaker: For the first time in 13 years, the higher cost of borrowing has resulted in future uncertainty, creating corporate winners and losers.
Speaker: Hedge fund strategies such as equity and credit long short may look to capitalize on the wider market environment and generate alpha on both sides of the book.
Speaker: Macro multi strategy hedge funds may be able to capitalize from geopolitical risks, whilst trend following funds may benefit from these higher cash rates.
Speaker: They complement each other well as the return profile is different and offer that diversification benefit.
Speaker: Now, we all know that the evaluation of a hedge fund is absolutely critical.
Speaker: What are the key things that you look out for?
Speaker: And equally, what would you recommend a manager not to do?
Speaker: It will depend on the underlying strategy.
Speaker: At a high level, you want funds who will be consistent, who can apply their investment process, navigate different markets with strong risk principles.
Speaker: Longshore equities offer the benefit of uncorrelated returns.
Speaker: We look for the manager's ability to generate alpha.
Speaker: For relative value funds, who generally tend to be more levered, you're looking for managers with strong risk management principles.
Speaker: For event-driven funds, you're looking for experienced teams who understand the local regulatory environment and are able to delineate the correct risk return trade-off and exit strategy for an investment.
Speaker: For macro funds, you're also looking for strong risk management and also teams with expertise in structuring trades who can take advantage of the volatility and uncertainty across asset classes.
Speaker: We have a number of managers on our platform with products that have been hard closed for many years.
Speaker: We are open to all investment vehicles and select the most efficient one based on the situation.
Speaker: We invest across commingled, funds of one and managed accounts.
Speaker: Will, thank you very much for these insights and for joining me today.
Speaker: We do hope that listeners enjoyed learning more about strategies for investing into hedge funds.
Speaker: Thank you.
