For years, investors have been eyeing the Asian market with excitement. Along with the traditional markets, such as Japan, Hong Kong and Singapore, exciting new territories of Vietnam, Thailand and others are offering double-digit growth in a world where growth of any sort seems to be a bonus.
For years, investors have been eyeing the Asian market with excitement. Along with the traditional markets, such as Japan, Hong Kong and Singapore, exciting new territories of Vietnam, Thailand and others are offering double-digit growth in a world where growth of any sort seems to be a bonus.
And then there’s China. Soon to become the world’s largest economy, the country is gradually liberalising its financial markets and attracting funds from all over the world. It’s expected to be one of the most important countries in the world.
And within the region, the asset servicing industry has the experience and the expertise to support them. Both Singapore and Hong Kong are long-established hubs - perhaps more on the custody side than fund administration - while Japan’s somewhat moribund market is gaining efficiencies. The newer markets are standing on the shoulders of giants by investing in the latest technology and infrastructure to ensure they are fleet of foot and ready for business.
Yet Asia doesn’t host that many funds of its own. Asian funds tend to be domiciled in the likes of the Cayman Islands, Luxembourg or Dublin. Domestic only funds stay close to home, but anything with any international element goes overseas.
For some in the industry, this causes issues. “Firstly, we have the time difference. If we want to talk to our managers or compliance people, then we have to get them first thing in the morning or last thing at night,” says a representative from one of Hong Kong’s larger fund companies. “Reporting isn’t an issue because of automation, but if you have a question or want a personal response, you won’t necessarily get it answered straight away.
“Then there’s the cost - we have to factor in the regulatory costs for more regions and domiciles than we really need to. Especially at the moment, where there are so many regulations coming out of the countries most affected by the banking crisis, the costs for compliance are eating up more and more of our cash.
“And finally it’s a case of us being able to do it ourselves now - Luxembourg and Dublin - as well as others - are popular in Europe because Europe has both a large funds market and is a significant destination for inward investment. The same applies to North America and its relationship with the Caribbean domiciles. They are servicing a vibrant market. Well, Asia now has a vibrant market and we need to do something to ensure we have the ability to have our own Luxembourg or Cayman Islands.”
“At the end of 2008 there was a lot of fear in the market and, while it never really stopped, the vast majority of trades were carried out on an almost risk-free basis - anything that wasn’t as conservative as possible was ruled out by all the big name firms,” says one representative of a large global bank.
“But it was more about a fear of what may happen, instead of a reaction to what actually was happening in Hong Kong and once we realised it wasn’t going to be as bad as we all thought, the market opened up a bit. 2010 has been better than 2009, and hopefully 2011 will be better than 2010. We’re still fairly risk averse, we’re keeping an eye on what happens in Europe, and particularly what happens in China and there’s still a long way to go before the market is entirely comfortable again.”
This flight to quality was reflected in the stocks that were most popular, with the largest global and Chinese stocks taking up a disproportionate share of the market. Indeed the problems affecting the banking sector and Western economies meant that traders almost invariably looked to the East.
“The collapse of Lehman pushed traders’ eyes in a different direction,” says one expert. “Hong Kong has of course always had one eye on our neighbour but until 2008 we also had a big investment in Europe and the US. The pendulum has truly swung to China now, and I don’t know if it will ever switch back.”
Already, all the big international players have a major footprint on the island, and indeed many have privately said they will keep their base here as a gateway to the Chinese market, even if they do increase their presence on the mainland. Hong Kong is up there with London and New York as one of the three major banking hubs and it seems unlikely that mainland China even wants that to change, let alone encourages it.
State Street Corporation has recently launched a new hedge fund servicing business in Asia Pacific, and announced expansion plans for existing real-estate and private equity servicing operations in mainland China, Hong Kong and Singapore.
To support the expansion drive, State Street has appointed Carol Hall as senior managing director and head of alternative investment services in Asia Pacific. Hall will be based in Hong Kong, with direct responsibility for teams servicing private equity clients in Hong Kong and Singapore, and for the establishment of the hedge fund servicing business. Services offered will cover requirements for front, middle, and back-office, as well as a broad range of risk, performance and analytics services.
“I’m excited to take up the challenge of delivering State Street’s comprehensive range of hedge, private equity and real estate fund administration services in Asia Pacific,” said Hall. “Clients with investments in the region will benefit from our alternatives fund administration expertise, proven process controls and dedicated technology platforms – most importantly to be delivered by teams located in this time-zone.”
The hedge fund services will be offered through International Fund Services, a State Street company and the industry’s second largest hedge fund administrator and provider of middle and back office offerings supported by proprietary technology platforms. State Street already has a private equity and real estate service business in Asia and expects to add another 60 people in Hangzhou as that business expands.
State Street established a presence in Asia Pacific as an alternative funds service provider when it acquired Mourant International Finance Administration (MIFA) in 2010, with locations in Hong Kong and Singapore. Hall said allocations into alternative assets were expected to increase over the next few years, with rising demands from investment managers in Asia Pacific, and also from North American and European clients with a trading presence in the region.
“We will provide the same comprehensive services in Asia Pacific that we are delivering today in North America and Europe,” said Hall. “Functions can therefore be shared between jurisdictions, which will mean more timely and efficient service for clients.”
“Hong Kong has the history, the infrastructure and the legacy of plenty of companies established here,” says one expert. “I know the Chinese are aiming to have a huge presence of their own in this market but I don’t believe it will take over Hong Kong’s activities. Everything is already set up, people like living here and there is a huge appetite for growth in this market.”
A lobby group comprising initially of participants based in Hong Kong, New Zealand and Australia is in the process of being formed, which will work to develop an Asian domicile. Initial plans include work toward the creation of an Asian-style passport and a UCITS-style regulatory structure for Asia. New Zealand has a new regulatory regime inspired by UCITS and other jurisdictions are moving in a similar direction. NZ, however, is a long way away from the major financial centres of Asia, so it’s more likely that somewhere closer to home is going to feel the growth.
The catalyst for this is likely to be the rise of China,” says Paul Smith, chief executive at Triple A Partners, a Hong Kong-based advisory firm. “If domestic fund domiciliation legislation does get enacted, Hong Kong and/or mainland China will explode as a funds centre.”
While that development continues, other firms with an Asian presence are ramping up their operations. Following the hiring of former HSBC executive Colin Lunn to UBS, the Swiss bank has big plans for the fund administration on the ground in the region. UBS currently services most of its Asian fund of funds and hedge funds from centres in the Cayman Islands, Toronto and Europe but, says Christof Kutscher, CEO for Asia-Pacific at UBS Global Asset Management, clients are increasingly demanding a local presence.
“There is a role for a high-quality provider of fund-administration services in Asia,” says Kutscher, explaining that the firm is planning on building services to hedge funds, funds of hedge funds, private equity, funds of private equity funds and UCITS-based funds from Singapore, where it already has an operations centre. It is also upgrading its offering for sovereign wealth funds and other major clients in both Singapore and Hong Kong.
As a result of the growing appetite by banks in the region, technology providers are also making a real effort - and because in many cases they have the opportunity to start from a clean state, the new launches in new economies are often absolute best of breed, often at a lower cost to their more established rivals.
