What’s next for the hedge fund industry in Hong Kong?

Hedge funds have weathered numerous events in recent years, including the pandemic, high inflation, market volatility and technological advances. Fund managers are examining how to rethink expectations for asset allocation, regulatory change and technology in the light of these rapid developments.

Meanwhile, as a gateway to mainland China and the leading financial hub in the region, Hong Kong can help attract hedge fund managers and investors. Hedge funds, meanwhile, can tap into Hong Kong’s highly skilled workforce and continue to grow its reputation as an international asset management center.

Emphasizing culture and flexibility to win over talent

Hong Kong’s talent pool is attractive to global hedge funds, which means plenty of competition for investment and non-investment people, said Simon Chow, Managing Director, Head of Asian Research, at North Rock Capital Management. Business results are always a priority but so is building the right workforce and culture.

“There is a big focus on alpha generation at North Rock, but at the same time, we also equally care about collaboration, inclusiveness and giving the teams recognition that they deserve,” Chow said.

“Another emerging demand from job candidates in the post-COVID era is flexibility, said Ann Ng, Partner, Hong Kong and Head of Maples and Calder’s Asia Funds & Investment Management practice.

“We adopted agile working even before the pandemic. We recognized that the flexibility of remote work, flexible schedules, and team autonomy not only improve work-life balance and productivity, it can also play a crucial role in attracting and retaining talent and keeping team members motivated. We continue to review and adjust our policies to ensure we maintain a healthy work culture. [We decided that in order to get the right people, these are people who want flexibility, they want to be able to work in their homes on their farm at the beach; wherever it might be,]” she said.

Ng notes how Hong Kong is particularly attractive to younger workers from other countries around the world, even when the pandemic made it difficult to access the market. “This is where they want to be,” she said. “This is where they want to hang out, do business and also to be able to network … with international people who are entrepreneurial and who want to do business, and that’s why we’re all here.”

A shift toward alternative investments

Many traditional asset classes performed well in 2022, even if they didn’t necessarily beat inflation  — but alternative investments outperformed. Unsurprisingly, allocations into alternatives are picking up, said Cora Tang, Global Hedge Product Manager and APAC Head of Product for Alternatives State Street.

Hedge funds are operating in “an incredibly complex environment,” said Michael Garrow, Chief Investment Officer and Co-Founder, HS Group (Hong Kong) Limited, whose firm’s limited partners are owners in alternative asset managers and have embraced other alternative strategies in recent years.

“When you look today, Asia has a very private heavy alternative industry. Hedge funds are only a small fraction,” Garrow said. “We’ve got roughly, in our region, 14,000 liquid stocks in Asia. You look at the database, and it’s about 2,000 Asian hedge fund managers.” That contrasts to the U.S., for example, where the ratio is around 1:1.

As hedge fund managers continue to navigate macroeconomic challenges, it’s important to understand that alternative strategies are situational. Garrow noted that the market is in a significant transition and “what we’re seeing is preference for shorter duration.”

Hong Kong remains attractive to hedge funds

Despite a pandemic, an uncertain economy and other risk-generating factors, Hong Kong retains its reputation as a place for hedge funds to grow and expand.

“Hong Kong has always been ranked as the best place in Asia for hedge funds. … We have the best financial infrastructure, a huge talent pool and a regulatory system based on common law”, said Albert Goh, Chief Investment Officer, Hong Kong Monetary Authority (HKMA). Hong Kong is in a unique position, as it is part of China but also fully integrated into the global financial system.

“Hong Kong and the Mainland now enjoy complete mutual access across a full spectrum of asset classes, including equities, bonds, ETFs and now derivatives (through Swap Connect),” Goh said. “This has created more investment options, alpha opportunities and risk management tools for all investors, especially Hong Kong based hedge funds.”

Meanwhile, many mainland-based fund managers are setting up shop in Hong Kong to meet investor demand for U.S. dollar-based products and international exposure since China reopened its borders. “And that’s exactly what Hong Kong is good for,” Ng said. “It’s entrepreneurial. People want to come here to do business and to ensure that they can grow their business.”

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