Hedge Funds Say Too Many Rules...
24 September 2010
Exclusive Interview
The market reckons that the final draft of the European Union’s Alternative Investment Fund Managers (AIFM) Directive (hereinafter referred to as “Directive”) will be implemented at the end of this year. When that time comes, funds that are registered in non-member countries may all be excluded. The investments of European Union investors abroad may also be limited. People in the industry think that the hedge funds in Asia may instead gain from this seeming loss.
Advantageous for Hong Kong to Lean against China
“Many fund managers will likely think that since the European Union has so many constraints and there is no lack of opportunities in Asia, why not go to Asia and try? Too many groundless rules will only drag down the entire market.” This was what Dermot Butler, Chairman of Custom House, said when he accepted the exclusive interview of this paper in Hong Kong.
He pointed out that five years ago, the European Union was one of the treasure troves of the hedge fund world. It was partially because of the “Directive” that checked the development of the hedge funds. Compared to Europe and the United States, there may be more earning opportunities in the emerging markets. Other than the “four BRIC countries”, many hedge funds have already switched to investing in “CIVETs” (Colombia, Indonesia, Vietnam, Ecuador and Thailand).
According to the information from Hedge Fund Research, the market expects the renminbi to appreciate in value. This has stimulated investors to increase investments in the Asian hedge fund market in the second quarter of this year by RMB 360 million (US dollar ．similarly hereinafter). This has turned around the initial situation that recorded a net outflow of funds. Up till the first half of the year, the capital of Asian hedge funds totals RMB 74.4 billion.
At the beginning of this year, one after another, internationally well-known hedge funds indicated that they planned to set up offices in Hong Kong. They include Soros Fund Management that is under George Soros, founder of Quantum Fund, London’s GLG Partners and Algebris Investments.
Butler expects that more and more European and American hedge funds will be lured by the development opportunities in mainland China to develop businesses in Hong Kong. This is more or less related to the tightening of relevant regulations in Europe; though Singapore’s regulatory environment is very attractive to hedge funds, Hong Kong’s advantage of being part of China still weighs heavily in the market.
The annual 2009 – 2010 report of the Hong Kong Securities and Futures Commission pointed out that the hedge fund industry continued to grow over the last year. The number of licensed hedge fund managers and consultants went up by about 20% for the year. As for licensees under hedge fund companies, the number also increased by close to 25%.
"Directive" Also Has Impact On Asia
However, the “Directive” also has a definite impact on the Asian market. Butler said frankly that for some hedge funds that may be subject to relatively stringent European regulatory requirements, they may forgo the European customers. It is also expected that the “Directive” will reduce the investments of European investors into hedge funds in Asia, including the stock market.
Chan Ka Keung, Secretary for Financial Services and the Treasury, delivered a keynote speech recently in the “HFR Hedge Fund Industry Summit: Asia 2010”. In his speech, he expressed that the assets currently managed by Hong Kong’s hedge fund industry total RMB 55.3 billion. Of this capital, 40% comes from European investors. Therefore, it is very important to allow hedge fund managers in Hong Kong to continue to service local customers. He stressed that none of the European Union rules should discriminate against fund mangers in non-member countries.
Dermot S. L. Butler, Chairman of Custom House Global Fund Services Ltd.
Ralph Chicktong, MD of Custom House Fund Services (Singapore) Pte. Ltd.
- Dermot Butler (front) thinks that though Singapore’s regulatory environment is very attractive to hedge funds, Hong Kong’s advantage of being part of China still weighs heavily in the market. (Photo by Huang Junyao)
24 September 2010
Convoy for High-Frequency Trading
High-frequency trading (HFT) is regarded by many as the main culprit for causing the “flash crash”. As a result, those hedge funds that are good at employing this kind of investment strategy have become the targets of public criticism. Some of those in charge of hedge funds are opposed to the supervision of high-frequency trading. Even if rules are set, they would be relatively hard to implement.
Dermot Butler, Chairman of Custom House, expressed that while high-frequency trading is a kind of rather complex strategy, very often, hedge fund managers have a relatively good grasp of it.
“No doubt that many hedge funds employ high-frequency trading, but I think that the market is pointing fingers at them wrongly. High-frequency trading is a natural development in today’s electronic age. I do not think that it requires special supervision. In reality, it would also be relatively hard to implement.” Ralph Chicktong, Managing Director of Custom House who is based in Singapore, said frankly that he is not an expert on high-frequency trading. However, he feels that the market does not fully understand the situation.
In the wake of the “flash crash” on 6 May this year, the US Securities and Exchange Commission has been considering to enact legislation that forces high-frequency trading to “slow down”. Similarly, Martin Wheatley, Chief Executive Officer of Hong Kong Securities and Futures Commission, earlier urged for risks in relevant transactions to be controlled via the two areas of reducing transaction speed and increasing transaction cost.
High-frequency trading seems to be coming along aggressively. However, Butler expressed that only a small portion of the over 600 investment fund accounts that his company administers employ high-frequency trading. Hence, it is expected that there will not be too big changes in the said proportion in the next two years.
He explained that a very high investment is required for both the software and hardware involved. He cited an example of one of the customers and pointed out that the investment cost to put in place high-frequency trading was expected to be as high as USD10 million. As for whether the capital can be recouped, it is still a question mark.
Fri 24.Sep