Asia
11 January 2012
With the eyes of the financial world looking East, Asia’s asset servicing
industry is going strong
Image: Shutterstock
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.”
This desire is starting to translate into action. A lobby group initially comprising 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. Asia’s hedge-fund industry looks likely to struggle in 2012 after a year in which growth stagnated, performance faltered and managers struggled to raise capital.
123 Asian hedge funds closed in the first 10 months of 2011, according to Singapore-based data provider Eurekahedge. Hedge funds in the region manage $125 billion, lower than the peak of $176 billion in 2007, according to Eurekahedge.
Asian hedge funds lost on average 8.7 percent in 2011 through November, their second-worst year on record, according to Eurekahedge. The MSCI Asia Pacific Index (MXAP) declined 17 per cent during the same period amid concern that the European sovereign-debt crisis would lead to a global slowdown.
About 32 percent of Asia-focused hedge funds tracked by Eurekahedge generated positive returns in the first 11 months of 2011, down from 75 percent the year before.
Asian hedge fund startups also slowed. There were 122 new hedge funds in the region last year through October, compared with 183 in all of 2010, according to Eurekahedge.
Institutional allocations have preferred bigger managers. Most of the $18.2 billion in capital inflows since the second half of 2009 went to larger funds, Eurekahedge said in a report in October.
Money is also flowing to the Asian desks of global hedge funds. Global-mandated funds accounted for 19 per cent of the assets in Asia’s hedge fund industry as of August, compared with 12 percent in 2007, according to Eurekahedge.
“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 for 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 slate, the new launches in new economies are often absolute best of breed, often at a lower cost to their more established rivals.
It’s not just the banks that are seeing the benefits of encouraging more work to be done in the region. The Monetary Authority of Singapore has placed a priority on strengthening the city state’s attractiveness as a destination for fund administration business, while the authorities in Hong Kong and some of the emerging markets are doing the same.
“In many ways the region has the best of both worlds,” says consultant Peter Mariest. “Some of the jurisdictions are long-established and highly regarded, with a strong infrastructure and highly-regarded workforce. They’re going to get the business from all corners of the world. Others are still working to implement all the requirements needed to be an attractive domicile, but this means they can look at other regions and pick the best practices from there. They don’t have the disadvantage of legacy systems or out of date working practices and they can often offer attractive costs savings that firms who have seen a downturn in their alpha will be attracted to.”
Singapore - along with other players in the region - has also made huge strides when it comes to tax treaties with its neighbours, particularly when it comes to taxation of funds. It has an agreement with India, a growing source of hedge fund investment as well as treaties with other important sources of funds. Indian-owned funds based in Singapore are set to be a significant source of growth.
India itself, long a favoured destination for financial firms looking for a destination for their back offices, remains in the mix. Its large pool of a hugely educated workforce, technical infrastructure, low costs and existing reputation as a back office hub means it can never be ruled out.
Hong Kong is always going to be a vital centre, and while Japan continues its recovery from the devastation last year, it doesn’t seem to have the ambition to become a major centre for the region - preferring to concentrate on its domestic investments. The new economies of Thailand, Vietnam, Malaysia and Indonesia will play a part, although in some of those countries there remain concerns about the stability of the governments, as well as a relatively short track record when it comes to managing international investments.
But it’s the region as a whole that is going to benefit. With Asia now an established and valued investment centre, the subsidiary sides of the business are exerting their strength. The development of the back office in the region may end up being a battle between two or three highly regarded domiciles but as the European and Caribbean models have proved, there is likely to be room for more than one centre.
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.”
This desire is starting to translate into action. A lobby group initially comprising 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. Asia’s hedge-fund industry looks likely to struggle in 2012 after a year in which growth stagnated, performance faltered and managers struggled to raise capital.
123 Asian hedge funds closed in the first 10 months of 2011, according to Singapore-based data provider Eurekahedge. Hedge funds in the region manage $125 billion, lower than the peak of $176 billion in 2007, according to Eurekahedge.
Asian hedge funds lost on average 8.7 percent in 2011 through November, their second-worst year on record, according to Eurekahedge. The MSCI Asia Pacific Index (MXAP) declined 17 per cent during the same period amid concern that the European sovereign-debt crisis would lead to a global slowdown.
About 32 percent of Asia-focused hedge funds tracked by Eurekahedge generated positive returns in the first 11 months of 2011, down from 75 percent the year before.
Asian hedge fund startups also slowed. There were 122 new hedge funds in the region last year through October, compared with 183 in all of 2010, according to Eurekahedge.
Institutional allocations have preferred bigger managers. Most of the $18.2 billion in capital inflows since the second half of 2009 went to larger funds, Eurekahedge said in a report in October.
Money is also flowing to the Asian desks of global hedge funds. Global-mandated funds accounted for 19 per cent of the assets in Asia’s hedge fund industry as of August, compared with 12 percent in 2007, according to Eurekahedge.
“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 for 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 slate, the new launches in new economies are often absolute best of breed, often at a lower cost to their more established rivals.
It’s not just the banks that are seeing the benefits of encouraging more work to be done in the region. The Monetary Authority of Singapore has placed a priority on strengthening the city state’s attractiveness as a destination for fund administration business, while the authorities in Hong Kong and some of the emerging markets are doing the same.
“In many ways the region has the best of both worlds,” says consultant Peter Mariest. “Some of the jurisdictions are long-established and highly regarded, with a strong infrastructure and highly-regarded workforce. They’re going to get the business from all corners of the world. Others are still working to implement all the requirements needed to be an attractive domicile, but this means they can look at other regions and pick the best practices from there. They don’t have the disadvantage of legacy systems or out of date working practices and they can often offer attractive costs savings that firms who have seen a downturn in their alpha will be attracted to.”
Singapore - along with other players in the region - has also made huge strides when it comes to tax treaties with its neighbours, particularly when it comes to taxation of funds. It has an agreement with India, a growing source of hedge fund investment as well as treaties with other important sources of funds. Indian-owned funds based in Singapore are set to be a significant source of growth.
India itself, long a favoured destination for financial firms looking for a destination for their back offices, remains in the mix. Its large pool of a hugely educated workforce, technical infrastructure, low costs and existing reputation as a back office hub means it can never be ruled out.
Hong Kong is always going to be a vital centre, and while Japan continues its recovery from the devastation last year, it doesn’t seem to have the ambition to become a major centre for the region - preferring to concentrate on its domestic investments. The new economies of Thailand, Vietnam, Malaysia and Indonesia will play a part, although in some of those countries there remain concerns about the stability of the governments, as well as a relatively short track record when it comes to managing international investments.
But it’s the region as a whole that is going to benefit. With Asia now an established and valued investment centre, the subsidiary sides of the business are exerting their strength. The development of the back office in the region may end up being a battle between two or three highly regarded domiciles but as the European and Caribbean models have proved, there is likely to be room for more than one centre.
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