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HSBC Private Bank maintains highest conviction overweight in hedge funds to maintain active approach to risk management

Wednesday, November 10, 2010
Opalesque Industry Update - HSBC Private Bank is maintaining its highest conviction overweight in hedge funds in the belief that the current investment environment calls for an active approach to risk management which can be provided by hedge funds.

HSBC is in the top three globally of hedge fund providers and most importantly has one of the largest proprietary research capabilities, which is of paramount importance in order to undertake thorough operational due diligence.

Commenting on the overweight position, Willem Sels, UK Head of Investment Strategy at HSBC Private Bank says:

“Our view that we will avoid a double dip recession appears to be gaining ground, particularly given the additional quantitative easing in the US announced last week. We remain optimistic regarding the future opportunity set for hedge fund managers. As evidenced by the events of recent months, the current investment environment calls for an active approach to risk management, which we believe can be provided by hedge funds.

“2010 was characterised by volatile markets that were driven by macro events and significant swings in risk appetite. One of the major challenges for investors was the high correlation between assets. As the deflation / recession scenario has now become much less probable, we believe that more fundamental analysis will become more important in the coming year. That will increase the need for active management, and the importance of long / short positioning within portfolios. Hedge funds are traditionally well placed to look at relative value between assets and to exploit pricing anomalies. Selecting hedge funds with a good track record in relative value, however, is essential and this is where HSBC Private Bank benefits from the strength of its research capability and commitment to a thorough due diligence process.”

Commenting on the outlook for the various hedge fund strategies, Tim Gascoigne, Global Head of Portfolio Management at HSBC Alternative Investments Limited and Manager of HSBC UCITS AdvantEdge Fund of Hedge Funds says,

“This year continues to be a challenging environment for investors, as risk appetite reversals have required a strong risk management framework across strategies. In addition, asset correlation has been particularly high, reflecting uncertainty in markets and providing few hiding spots from downside. In an environment where fundamentals have been largely ignored, hedge fund managers, in general, remained true to their primary goal: capital preservation. When the environment is not conducive to their investment approach, they limit exposure to losses and avoid unnecessary risks. Therefore, we have seen lower leverage and market exposure, as managers await better risk-adjusted opportunities.

“Looking ahead, our highest conviction is with the discretionary macro strategy. We expect the uncertain macroeconomic outlook to provide opportunities for interest rates and currency strategies and we focus on these two most liquid sectors. Equity markets have been driven by economic sentiment for two years, creating significant miss-pricing of individual equities. In our view, as and when the environment changes and individual stock prices reflect more closely the fundamentals of these companies we expect to see outsized returns from equity long/short strategies that adopt a more fundamental and value oriented approach. Equity market neutral strategies, on the other hand, have performed well this year, driven by technical models in both equities and futures.

“Managers focusing on distressed opportunities continue to perform positively, supported by advances in individual work-outs. In addition, residential mortgage-backed security strategies performed well, driven both by carry and pricing which continue to reflect a gradual recovery in this sector. In addition, we believe that the maturity calendar from 2011 to 2014 for many debt issues will create opportunities for managers in catalyst-dependent relative value credit trades.

“The up-tick in merger activity is likely to continue to support merger arbitrage as a strategy, as options for organic profit growth amid consumer deleveraging seem limited and cost-cutting solutions are almost exhausted, leaving the possible synergy from take-overs as an attractive option.

“Although hedge fund managers have been challenged in the current sentiment-driven environment, we believe a strategically diversified and balanced approach to hedge funds will continue to benefit investors going forward. As markets normalise and fundamentals dictate price movements again, we believe hedge funds will be well positioned to take advantage of burgeoning opportunities. Consequently, we maintain our positive view on hedge funds.”

(press release)

About HSBC Private Bank

HSBC Private Bank is the marketing name for the private banking business conducted by the principal private banking subsidiaries of the HSBC Group worldwide. HSBC Private Bank and the private banking activities of HSBC Trinkaus as well as the HSBC Private Banking entities, known collectively as Global Private Banking, provide services to high net worth individuals and their families through 96 locations in some 43 countries and territories in Europe, the Americas, the Asia-Pacific region, the Middle East and Africa. Private Banking and Wealth Management Services in and from the United States are offered through HSBC Private Bank Americas, a division of HSBC Bank USA, N.A., and HSBC Private Bank International in Miami.

At 1st March 2010 profits before tax were US$1,108 million for the year ended 31 December 2009 and combined client assets under management were US$460 billion. HSBC Private Bank draws on the strength of the HSBC Group, one of the world’s largest banking and financial services organisations, providing a comprehensive range of financial services more than 100 million customers.

- FG

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