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HSBC maintains highest conviction overweight in hedge funds, 'discretionary macro remains our highest conviction strategy'

Tuesday, June 15, 2010
Opalesque Industry Update - Having reduced its exposure to risk in global equities on 21st April 2010, HSBC Private Bank is maintaining its highest conviction overweight in hedge funds in the belief that hedge funds are well positioned to profit from the current market conditions and higher volatility.

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, Fredrik Nerbrand, Head of Global Strategy at HSBC Private Bank says,

“In contrast to the majority of 2009 in which investors were rewarded for taking on risk, we believe 2010 will be a rather different environment – a year of differentiation where equity and bond markets are likely to be lower than they have been since March 2009. Therefore, it will be more difficult for investors to make money just by being 'long'; other strategies need to be implemented to increase expected portfolio returns. Hedge funds are traditionally well placed to look at relative value between assets and to exploit pricing anomalies. They also tend to be good at taking advantage of higher volatility in the markets, which we are currently observing. Selecting hedge funds with a good track record in relative value and volatility strategies, 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, Peter Rigg, Head of Alternative Investment Group at HSBC says,

“As discussed in our last investment outlook, 2010 is proving to be a year of differentiation with macroeconomic and sovereign concerns impacting asset class performance. The sovereign debt crisis that started in Greece spilled over into equity and credit markets last month, despite considerable efforts by the IMF and the ECB to stem the contagion. In addition, concerns about Chinese tightening are weighing on investor sentiment.

“In this environment, managers that have been defensively positioned for some time performed well, taking advantage of macroeconomic and regulatory opportunities in the financial, healthcare and materials sectors. Long volatility strategies also benefited from a broad opportunity set as implied volatility in equity and foreign exchange markets spiked.

“Discretionary macro remains our highest conviction strategy and we expect managers to continue generating above-average returns for the foreseeable future. Our view has, if anything, been reinforced by the events of May. The dispersion in the timing of interest rate moves between the emerging markets and the developed world, and the potential divergences within the Eurozone are creating long-term trading opportunities for this strategy.

“We remain positive on the classical distressed strategy, with managers exploiting the vast opportunity set through short-term restructurings or bankruptcies. Historically, the highest returns in this sector are made after the apex of the default rate cycle, which we believe occurred at the end of last year. In particular, the busy refinancing calendar from 2011 to 2014 should create event driven situations.

“In conclusion, we continue to have an optimistic outlook for the performance of hedge funds for the coming 12 months. As evidenced by the events of recent months, the current investment environment calls for an active approach to risk management, which we believe is provided by hedge funds. In addition, reduced competition from the proprietary trading activities of banks due to looming regulation is proving supportive to managers. However, we remain cautious on the impact of regulatory reform on hedge funds, but ultimately believe that any legislation would take time to implement, allowing managers to adapt.”

HSBC Private Bank is the marketing name for the private banking business conducted by the principal private banking subsidiaries of the HSBC Group worldwide. 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.


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