Alternative Investments
For Institutional Investors Only
Why invest in alternatives?
Alternative investments cover a wide range of strategies and opportunities, including hedge funds, active currency management,
commodities, private equity and infrastructure. What these very diverse strategies have in common is that they aim to deliver absolute
returns with low volatility, and they can therefore be very useful in the context of pension portfolios.
The recent market turmoil has meant that pension schemes are increasingly looking to use diversification to manage investment risk.
Alternative investments have an important role to play in this, as they generally have low correlations with mainstream asset classes.
Although some alternative assets, in particular hedge funds, have suffered along with the major asset classes in the market volatility, they
have still produced superior returns over a longer time scale, and offer these useful diversification benefits.
Although historically there were not many choices available for pension investors in the alternative assets universe, innovations in the
product development field mean that there is now a very wide range of options on offer. Some of these choices are examined in more
detail overleaf.
Performance of alternatives during market volatility
Performance this decade so far (Jan 2000 – May 2009)
200
183.9
180
140
133.5
134.5
120
100
80
72.5
60
40
Apr 09
Oct 08
Jan 09
Jan 08
Apr 08
Jul 08
Oct 07
Jan 07
Apr 07
Jul 07
Oct 06
Jan 06
Apr 06
Jul 06
Oct 05
Jan 05
Apr 05
Jul 05
Jul 04
Oct 04
Jan 04
Apr 04
Oct 03
Jan 03
Apr 03
Jul 03
Oct 02
Jan 02
Apr 02
Jul 02
Jul 01
Oct 01
Jan 01
Apr 01
0
Oct 00
20
Jan 00
Apr 00
Jul 00
Index (01/01/2000 = 100)
160
G l oba l E qui t i es
Hedge Funds
G l oba l B onds
3y r U S Tr ea s ur i es
S our ce: Bloomberg
Based on USD total returns of HFRI Index, M SC I Wor l d I ndex , M er r i l l Lync h G l oba l B r oa d M a r k et I ndex a nd M er r i l l
Lynch U S Treasuries 3yr index
Provided for illustrative purposes only. Past performance is not a guide to future returns.
Alternative Investments
For Institutional Investors Only
Why HSBC Global Asset Management?
HSBC Global Asset Management offers a range of alternative investment strategies through our specialist business, Halbis Capital
Management (Halbis) and also through HSBC Group business units, HSBC Alternative Investments Limited (HAIL) and HSBC Specialist
Investments Limited (HSIL).
From single strategy hedge funds to multi-faceted quantitative products, we are able to offer attractive propositions to clients across a
range of risk/return parameters. Our goal is to meet the challenges of the dynamic and evolving alternatives industry with a constant
focus on innovation whilst meeting client needs.
Our hedge fund specialist, HAIL, is one of the top five hedge fund advisors worldwide, with US$44.31 billion1 of client assets
invested in alternatives. HAIL advises on the HSBC fund of hedge funds, segregated hedge fund mandates, real estate and private
equity products for institutional and high net worth investors. The group has been advising on alternative investments since 1989,
with senior investment members having worked together since 1996. HAIL was the winner of Professional Pensions Fund of Hedge
Fund manager of the year in 2007 and 2008.
HSBC Specialist Investments Limited invests capital on behalf of clients and HSBC in selected sectors of the infrastructure and
private equity markets. HSIL is the advisor to HSBC Infrastructure Company Limited, the first infrastructure investment company to be
listed on the London Stock Exchange.
Halbis, HSBC’s active fundamental investment manager, offers a diverse range of single-strategy hedge funds, covering equities, fixed
income and currency.
HSBC aims to provide a fully integrated answer to all of our clients’ investment requirements and this is backed by a superior range of
specialist and independent capabilities. The inter-relation with the broader HSBC Group and its strategic partnerships provides the
scope to advise clients on various hedge fund strategies, infrastructure investment and currency solutions.
1as at December 2008
Commodities
Credit
Distressed
European
Emerging Markets
India
Technology
Global Bond Market Neutral
Global Macro
Multi-strategy Bond
Currency overlay
HSBC Alternative Investments2
GH Strategy
Infrastructure
Real Estate
Asian Private Equity
Capital USA
2 HAIL is wholly owned by HSBC Private Bank (UK) Limited, a subsidiary of HSBC Bank plc, which is ultimately owned by HSBC Holdings plc.
Currency
For Institutional Investors Only
Why invest in currency?
In recent years, currency has moved away from being used as just an overlay to be recognised as an asset class in its own right.
Currency offers particular attractions in the current economic climate because it is a very liquid and transparent asset. New strategies
have been developed recently that concentrate on generating alpha from currency investment. By identifying and exploiting the
inefficiencies in foreign exchange markets in a systematic fashion, attractive returns with a low correlation to other asset classes and
low volatility can be achieved.
HSBC’s offering
With this investment opportunity, we aim to offer consistent performance based on the active management of multiple currency trading
strategies in a risk controlled environment. Our currency investment team has extensive experience in currency trading, combined with
expertise in managing absolute return investment strategies.
The HSBC Global Currency Fund is an absolute return strategy, which allocates to global currencies. A systematic draw-down
management facility seeks to protect both the principal and profit by actively de-levering with negative performance.
The Fund targets a range for annualised volatility of between 5 and 10%. Diversification across multiple alpha sources seeks to provide a
more stable return generation. The Fund performs a daily optimisation to react quickly to changes in market conditions.
The HSBC Global Currency Fund was launched in April 2009, but the investment team managing the product has operated a similar foreign
exchange strategy within the HSBC Investment Bank’s Global Markets Division since 2006. This strategy has shown a compound annualised
rate of return of 6.69%, with a standard deviation of 4.86% for period of July 2006 to July 2009.
Performance detail
Cumulative Return
35%
30%
25%
20%
15%
10%
5%
0%
2007
HSBC FX Index
2008
JP Morgan Bond Index
2009
1m $Libor
Provided for illustrative purposes only and is not indicative of future returns of the HSBC Global Currency Fund. Past performance is not a guide
to future returns.
Libor – 1 month Libor; JPM – JP Morgan Bond Index.
Source: Bloomberg and HSBC Bank plc as at July 2009.
*The HSBC FX index reflects performance, net of fees, of the HSBC Global Currency Basket strategy (incepted in July 2006) operated within
HSBC Global Markets.
Currency
For Institutional Investors Only
Distribution of returns
14
Monthly Periods
12
10
8
6
4
2
9 to 10
7 to 8
5 to 6
3 to 4
1 to 2
-1 to 0
-3 to -2
-5 to -4
-7 to -6
-9 to -8
< -10%
0
Return Range (%)
Monthly Performance (%) Net of Fees*
Year
Jan
Feb
Mar
Apr
May
Jun
Jul
2009
-0.40%
0.88%
0.54%
-1.37%
0.71%
-1.18%
1.74%
2008
2.56%
-0.24%
3.35%
-0.96%
0.11%
-0.04%
0.05%
-0.91%
-0.75%
0.72%
0.65%
-0.60%
3.92%
2007
0.64%
-0.84%
1.58%
0.04%
0.34%
3.51%
-0.94%
0.02%
-0.60%
1.42%
2.92%
-2.17%
5.92%
1.60%
0.69%
0.61%
1.37%
2.06%
3.25%
9.95%
2006
Statistical Analysis
HSBC
JPM
Libor
Compound Annualized
Rate of Return (ROR)
6.69%
7.26%
3.65%
Cumulative Return
22.09%
24.13%
Average Yearly Return
7.16%
Best Month
Aug
Sep
Oct
Nov
Dec
Year
0.88%
HSBC
JPM
Libor
Standard Deviation
4.86%
5.68%
0.56%
11.69%
Sharpe Ratio (3.7%)
0.61
0.62
-0.08
7.82%
3.79%
Downside Deviation (3.7%)
2.60%
3.16%
0.44%
3.51%
5.63%
0.48%
Sortino Ratio (3.7%)
1.10
1.07
-0.11
Worst Month
-2.17%
-3.13%
0.03%
Max Drawdown
-2.55%
-4.87%
% Positive Months
64.86%
62.16%
100.00%
Months In Maximum Drawdown
15
7
0.14
0.27
Months To Recover
N/A
Returns
Correlation R
Risk
Provided for illustrative purposes only and is not indicative of future returns of the HSBC Global Currency Fund. Past performance is not a guide
to future returns.
Libor – 1 month Libor; JPM – JP Morgan Bond Index.
Source: Bloomberg and HSBC Bank plc as at July 2009.
*The HSBC FX index reflects performance, net of fees, of the HSBC Global Currency Basket strategy (incepted in July 2006) operated within
HSBC Global Markets.
Infrastructure
For Institutional Investors Only
Why invest in infrastructure assets?
Infrastructure investment has become an increasing area of focus among investors around the world. The growing need for the
development of new infrastructure assets and the refurbishment of existing ones, in both developed and emerging countries, has
caused public entities to seek and facilitate the participation of private capital. Across the world countries are introducing the legal
frameworks necessary to attract private investments. The global need for infrastructure capital presents an attractive opportunity for
investors with long-term investment horizons. Infrastructure investments are typically expected to provide a number of attractive
features and benefits to investors given their quasi-monopolistic nature.
Predictable long term cash flows Income from operational infrastructure assets is relatively predictable and stable given the essential nature of
underlying services. In certain circumstances income is contractually agreed and fixed over the long term (20+ years) with government bodies, in
others it is generated based on the asset’s usage or regulated by the law.
High barriers to entry The significant capital expenditures and legal frameworks designed by governments to regulate natural monopolies
act as barriers to entry thus reducing or eliminating competitive threats.
Risk mitigation Infrastructure allows experienced investors to mitigate a significant portion of investment risks. Construction and operating
risks can be off-laid to experienced specialist contractors / operators. Financial risks (such as interest rates, inflation, taxation) can be
effectively mitigated through careful structuring and hedging policies.
Diversification Based on the relative defensiveness of their cash flows against the economic cycle and the potential to mitigate important
risks, infrastructure can offer valuable diversification benefits to investors.
HSBC’s offering
The HSBC Environmental Infrastructure Fund has been established to
Illustrative Investment Allocation
capitalise on the supportive background for infrastructure by investing in
greenfield infrastructure projects that protect or enhance the
environment. This includes environmental infrastructure projects at the
development stage, water treatment and waste management providers
and clean or renewable energy related assets. The Fund aims to produce
Other (Energy
Efficient)
returns by getting involved at an early stage in projects, and seeking
investments with the potential to produce strong cashflows over the
Renewable/
Clean Energy
(eg Wind
and Solar)
long term. An example of the type of seed investment that the Fund is
involved with is its 49% stake in the ‘Partnerships for Renewables’. This
is a joint venture with the Carbon Trust, a company set up by the UK
Water
government to accelerate the move to a low carbon economy.
The closed-ended Fund has a 10-year life and its performance objective
is to target gross IRR of 20% (the internal rate of return before fund
management fees and carried interest) although there can be no
assurance that this target will be achieved. It is managed by HSBC
Specialist Fund Management Ltd, part of HSBC Specialist Investments
Limited (HSIL). The team was one of the earliest participants in the
global infrastructure investment market and has a proven and strong
track record dating back over ten years. The team can harness a diverse
range of skills, and it is also able to draw upon HSBC Group’s strong
global presence and reputation and expertise within the sector.
Waste
Fund of hedge funds
For Institutional Investors Only
Why invest in fund of hedge funds?
Funds of hedge funds aim to generate positive returns through strategic allocation and manager selection. They offer investors the
opportunity to invest in a number of different strategies and markets worldwide, thus reducing the manager and strategy risk of
investing in a single strategy fund. A further advantage to these vehicles is that they provide investors with access to a diversified
portfolio of hedge funds which would otherwise not be accessible due to the high investment minima for single funds. In addition,
funds of hedge funds are run by experienced teams who are able to carry out a thorough due diligence process that an individual
investor may not be able to conduct.
HSBC’s offering
The HSBC GH Fund (USD Class) is a globally diversified fund of hedge fund that aims to provide investors with absolute returns
independent of financial market movements. The Fund invests selectively in a number of hedge funds, which trade a range of different
strategies and markets worldwide. This flagship product has a strong 13-year track record of net annualised returns of 7.49% and was
able to outperform the majority of its peers in 2008.
HSBC Alternative Investments Limited (HAIL) acts as an advisor to the manager of the GH Fund, HSBC Management (Guernsey) Limited.
HAIL has been advising on alternative investments since 1989, with senior investment members having worked together since 1996. The
Fund is considered a core holding for clients allocating to alternative investments or a diversifier for an equity or a balanced portfolio.
In order to construct the portfolio, a rigorous research process is undertaken to filter the hedge fund universe into appropriate funds for
investment. The initial universe of over 6,000 funds is cut down to 200 - 250 potential investments. Regular due diligence is then
performed on these funds to ensure that only quality investments are maintained in this category. This includes both qualitative and
quantitative analysis. The list is reviewed formally on a monthly basis by the investment committee.
300.00
HSBC GH Fund
HFRI Fund of Funds Composite Index
MSCI World Index unhedged in USD terms
JP Morgan Global Government Bond Index unhedged in USD
275.00
NAV (USD)
250.00
225.00
200.00
175.00
150.00
125.00
100.00
Dec-1997
Dec-1999
Dec-2001
Dec-2003
Dec-2005
Dec-2007
Fund of hedge funds
For Institutional Investors Only
HFRI Fund of
JP Morgan Global
Funds Composite
Government Bond
Index
Index unhedged in USD
HSBC GH
Fund
MSCI World
Index
unhedged in
USD terms
MTD return
1.37%
-8.73%
0.81%
-3.94%
YTD return
1.37%
-8.73%
0.81%
-3.94%
1 year return
-13.57%
-41.05%
-18.00%
3.72%
Actual Return since inception
147.08%
38.62%
98.48%
113.32%
Annualised return since inception
7.40%
2.61%
5.56%
6.16%
Sharpe ratio (annualised since inception)*
0.44
n/a
0.19
0.27
Maximum drawdown
-18.30%
-48.40%
-21.85%
-8.14%
% positive months
68.42%
59.21%
64.47%
57.24%
Correlation
1.00
0.54
0.90
-0.10
Historic volatility
7.07%
15.61%
6.58%
6.87%
* The risk free rate used to calculate the sharpe ratio is the annualised return of USD 3M LIBOR Index over the period.
Data from 13 June 1996 to 30 January 2009.
Calculation based on NAV prices, net of: 1.75% p.a. management fee, 10% performance fee, (for performance exceeding benchmark)
Sources: HSBC Alternative Investments Limited, Bloomberg. Past performance is no indication of future performance
Contact details
For more information, please contact:
Nic Jones
Director, UK Institutional Sales
HSBC Global Asset Management (UK) Limited
78 St James’s St
London SW1A 1EJ
Tel: +44 20 7024 0389
Email: [email protected]
Kathleen Broekhof
Director, UK Institutional Sales
HSBC Global Asset Management (UK) Limited
78 St James’s St
London SW1A 1EJ
Tel: +44 207024 0493
Email: [email protected]
Important information
For Institutional Investors Only
This document is for professional clients only. The contents of this document are confidential and may not be reproduced or further
distributed to any person or entity, whether in whole or in part, for any purpose. The material contained in this document is for
information only and does not constitute investment advice or a recommendation to any reader of this material to buy or sell
investments.
HSBC Global Asset Management has based this document on information obtained from sources it believes to be reliable but which it has not
independently verified. HSBC Global Asset Management and HSBC Group accept no responsibility as to its accuracy or completeness.
This document is intended for discussion only and shall not be capable of creating any contractual or other legal obligations on the part of
HSBC Global Asset Management or any other HSBC Group company. Care has been taken to ensure the accuracy of this document but
HSBC Global Asset Management accepts no responsibility for any errors or omissions contained therein.
Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management
accepts no liability for any failure to meet such forecast, projection or target. The value of investments and any income from them can go
down as well as up. Where overseas investments are held the rate of exchange may cause the value of such investments to go down as
well as up.
Performance information shown in this document refers to the past and is not a guide to future returns
HSBC Global Currency Fund is a sub-fund of HSBC Global Investment Funds, a Luxembourg domiciled SICAV. UK based investors in
HSBC Global Investment Funds are advised that may not be afforded some of the protections conveyed by the provisions of the
Financial Services and Markets Act 2000. Distribution of the Fund prospectus and the offering of the shares may be restricted in certain
jurisdictions. Any person in possession of this prospectus and any person wishing to apply for shares should inform themselves of, and
to observe, all applicable laws and regulations of any relevant jurisdiction, including any applicable exchange control regulations and taxes
in the countries of their respective citizenship, residence and domicile. The prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction in which such offer or solicitation is not lawful or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. Please refer to the Prospectus for disclosure of
risk factors.
The information in this document is based on HSBC’s interpretation of current legislation and HM Customs & Revenue practice. While
we believe that this interpretation is correct, we cannot guarantee it. Legislation and tax practice may change in the future.
HSBC Global Asset Management encompasses four specialist businesses: Halbis, Sinopia, Multimanager and Liquidity. Halbis Capital
Management (UK) Limited (Halbis) and SINOPIA (Sinopia) Asset Management (UK) Limited are both authorised and regulated by the
Financial Services Authority. HSBC Multimanager and HSBC Liquidity are global business units which are part of HSBC Global Asset
Management.
This document is issued in the UK by HSBC Global Asset Management authorised and regulated by the Financial Services Authority.
16743 FP09 - 0739
www.assetmanagement.hsbc.com/uk