Soros Fund Management LLC, one of the top 10 hedge fund management firms in the world, with total assets of $25 billion, recently sent two of its top fund managers to Hong Kong to run its new headquarters in the city.

Before Soros' inroad into the city, over 30 large-scale global hedge fund operators, including GLG Partners Inc, which is comparable with the Soros Fund Management in terms of scale and popularity, had opened their offices here since May 2009.

Hedge funds differ from mutual funds and ordinary investors mainly in investment strategies. They can make use of unconventional strategies such as leverage, short selling and low-correlation positioning.

The new generation hedge funds offer various kinds of strategies as well as specializations. Some continue to employ the macro and long/short equity strategy while others have found their way into specialized market sectors such as derivatives, exchange traded funds (ETF), convertible bonds, junk bonds, sub-prime mortgage debts, credit default swaps (CDS), carbon emission products, carry trading, programmed trading and black-box high frequency trading.

Hedge funds used to raise capital from a small group of investors, including fund managers. But now the key capital contributors of hedge funds include pension funds, insurance companies, endowment funds and university funds, which are widely considered to be conservative and safe players. In fact, "hedging" strategies - when implemented properly - can generate more stable returns at lower risk than traditional asset allocation strategies do. This explains why pension funds, insurance firms and their ilk are increasingly allocating more funds to hedge fund managers, contributing to the rapid growth of the sector over the past ten years.

Data from the Securities and Futures Commission of Hong Kong showed that there were 245 hedge funds in the city at the end of 2008, managing an aggregate asset of $22 billion, of which 84 percent is owned by investors from the US and Europe.

Hong Kong has become the most favored haunt for hedge funds. In 2008 alone, 30 new hedge funds were set up with $1.6 billion fresh capital, helping the city become the only key financial center that saw net growth in the aggregate asset value of hedge funds, despite a 28 percent contraction in the total assets of hedge funds in Asia.

George Soros is a smart investor, who has a strong sense for business opportunities and a clear vision for the outlook for the global economy. He has, on more than one occasion, identified China as the "biggest" winner of the 2008 financial crisis, while predicting that the US will lose many of its competitive edges.

Expectations for yuan appreciation, the launch of margin trading and short-sell mechanisms in the mainland stock market, as well as the launch of stock index futures, are major events for hedge fund managers.

Many hedge fund managers, who have set up an operation in Hong Kong, are actually targeting opportunities on the mainland. By operating in Hong Kong, they can more readily glean first-hand information on the mainland's policies.

While Singapore has set up the lowest threshold in Asia for hedge funds, Hong Kong remains the most-favored destination for hedge funds in the region.

This is a translated and edited version of an article published in the April 2010 issue of Bauhinia magazine. Translation by George Ng.

Bauhinia Magazine

(HK Edition 04/14/2010 page2)