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SHUHEI ABE HAS HIS SIGHTS SET ON ASIA. THE founder and CEO of Sparx Group Co., Japan’s largest hedge fund firm, has traditionally focused on his domestic market, but the downturn in Japanese stocks over the past year has hit the company’s portfolios hard. Sparx’s assets dropped a steep 25 percent last year, to less than ¥498 billion ($6.5 billion) by the end of December.

Abe believes diversification is the remedy to Sparx’s problems. He is recasting the firm as a pan-Asian fund manager. To that end, he dispatched the company’s chief operating officer, Masaki Taniguchi, to Hong Kong last June to expand the group’s office there and spearhead the search for investment opportunities — and investors — across Asia. “We have been realigning our firm to pursue our business on the premise that Asia, including Japan, is one seamless economic region,” says Taniguchi. “The additional allocation of management resources to Hong Kong demonstrates our strategic commitment to the region.”
Sparx is far from alone. These days fund managers are flocking to Hong Kong or expanding their operations there. The city’s deep capital markets, abundant talent and friendly regulatory environment are luring institutional investors and alternative fund managers alike. Hong Kong’s easy access to the big Chinese market next door adds to the attraction, especially with authorities in Beijing moving to develop an offshore market in renminbi in the former British colony. As a result, this longtime banking and commercial hub can now boast of being a leading asset management center.

The number of money management firms in the city had risen to 798 at the end of 2010 from 580 three years earlier. Total assets increased more modestly, to HK$10 trillion ($1.3 trillion) from HK$9.6 trillion, but that occurred against a backdrop of weak markets that saw the MSCI Asia APEX 50 Index drop more than 11 percent during that period. The industry’s growth put Hong Kong well above rival Singapore and made the city the largest fund management center in Asia outside of Japan.

“We see more and more global asset management firms setting up office in Hong Kong,” says Jimmy Chan, CEO of Hong Kong–based Value Partners, Asia’s largest hedge fund, with $7.1 billion in assets under management. “Hong Kong is an international financial center with a well-established regulatory system and trading infrastructure.”

The buoyancy of fund management is part of a broader ascendancy of Hong Kong’s financial stature. The number of banking and financial businesses with regional headquarters in the city rose to 150 last year from 113 in 2007, according to Hong Kong government statistics. “Hong Kong has been entrusted with greater responsibility as a financial center by the global community since the financial crisis,” K.C. Chan, the government’s secretary for Financial Services and the Treasury, tells Institutional Investor.

The dynamism of Asian economies is the biggest factor in Hong Kong’s success. The region’s vibrant growth is attracting healthy flows of funds from investors in many sluggish Western economies and fueling the development of Asia’s own investor base.

“Growth in developed markets is likely to remain low in 2012, but we are positive on the outlook for Asia, which is supported by stronger fundamentals, particularly for China,” says Joanna Munro, Hong Kong–based CEO for Asia-Pacific at HSBC Global Asset Management. The firm, which manages $400 billion globally, runs most of its $60 billion in Asian assets from Hong Kong and has recently moved some of its key executives to the city. In August, Bill Maldonado, the firm’s global chief investment officer for equities, moved to Hong Kong from London and took on the additional role of CIO for Asia-Pacific. HSBC also appointed Patrice Conxicoeur as global head of insurance coverage, based in Hong Kong, to develop the group’s asset management business with major insurers.

Underscoring the growing investor interest in Asia, J.P. Morgan Securities (Asia Pacific) recently launched a new piece of investment software for the bank’s top 150 institutional investor clients around the world to help them identify investment opportunities in Asia. The software, JPM Interactive Models, allows fund managers to calculate the potential stock performance of more than 700 Asia-listed companies based on different performance scenarios. It is the first time the bank has introduced a global product out of Hong Kong, says Sunil Garg, J.P. Morgan’s Hong Kong–based head of Asia-Pacific research.

For many companies, the size and sophistication of Hong Kong’s capital markets and the strength of its financial infrastructure — including everything from a strong talent pool to a trusted legal and regulatory environment — make the city an ideal base for covering the region. Hong Kong is “one of the few truly international finance centers, based on regulatory support, talent, infrastructure and connectivity to the global world and China,” says HSBC’s Munro.

In 2011, for the third year in a row, Hong Kong led all other financial centers in terms of funds raised through initial public offerings. Companies reaped a total of $31.4 billion in 65 IPOs last year. That volume was half the $63 billion raised in 2010, but it still exceeded the $30.7 billion raised in 69 deals in New York, according to financial data provider Dealogic.

The local authorities have taken a number of steps to increase the attractiveness of operating in the city. In the past five years, the government has provided an exemption from stamp duties for certain exchange-traded funds — namely, those tracking indexes making up less than 40 percent of Hong Kong stocks. It has also established a network of agreements with 17 major trading and investment partners to eliminate double taxation. Those moves came on top of a number of established tax advantages, including no capital gains tax on the sale of shares of private companies, no tax on dividend income and no taxes on Hong Kong transactions profits for offshore funds. 

Access to the giant market across the border is also driving growth in Hong Kong. The fact that the city is China’s gateway to global financial markets is the main reason Sparx is building up its office there. The Tokyo-based hedge fund firm, which employs 173 people overall, has 32 staff in its Hong Kong office, including ten investment professionals. “We believe Hong Kong is uniquely positioned as the offshore financial center for China and that this will support growth in the years to come,” says COO Taniguchi.

Naomi Denning, head of investment for Asia-Pacific at advisory firm Towers Watson & Co., echoes that view. “Hong Kong has become even more important today for global asset managers than in the past,” she says. “This is not only because China’s position in the global economy remains strong even after the global financial crisis. Given the fact that Hong Kong continues to be the international financial center of China and a center for trading goods and services, the financial linkages between both economies remain robust.”

Pyramis Global Advisors, the institutional investment arm of Fidelity Investments, has been staffing up in Hong Kong since opening a distribution office there in 2009. The firm, which manages $18 billion in the Asia-Pacific region, has 20 staff in the office, including its head of international sales for Asia and several members of its global investment research and securities trading teams. The office spearheads the firm’s effort to gain Asian clients, including sovereign wealth funds and pension funds.

“Our presence in Hong Kong provides a critical resource for decisions made by the firm in the Asia-Pacific region,” says Kevin Uebelein, president and chairman of Smithfield, Rhode Island–based Pyramis. “The entire region is experiencing strong growth.”

A strong rise in demand from investors in Hong Kong, mainland China and Taiwan has allowed Franklin Templeton Investments to grow the assets it manages from Hong Kong to more than $9 billion currently from just $150 million ten years ago, says David Chang, the firm’s regional head for Greater China.

“We are very optimistic about the growth of institutional business across the Greater China region and the insurance channel in Hong Kong,” he says. “If anything, the uncertainty in the U.S. and the European Union will see greater importance of our Asian operations, including in Hong Kong.”

The lure of China remains strong even though the mainland’s equity markets have performed poorly of late. China’s CSI 300 Index fell 16 percent in 2011, largely as a result of the government’s tighter monetary policies, designed to cool the economy and prevent a real estate bubble.

Most analysts believe those policies have worked effectively. The consensus view is that Beijing has managed to ward off speculative excess and slow the economy to a more sustainable rate without provoking a hard landing. Last month the authorities announced that the economy grew by 9.2 percent in 2011, down from a rate of 10.4 percent the previous year. Most economists believe growth will slow further this year but will still achieve a pace of at least 8 percent. That should create a positive environment for the stock market, many analysts believe.

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