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Alts Agenda – Why BOC(HK) is focusing on quality not quantity

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For Bank of China (Hong Kong) (BOCHK) Private Banking, 2022 proved to be a stand-out year for its alternatives offerings. The lender closed several deals, including a private debt strategy for U/HNW clients. Despite that success, it plans to adopt a prudent approach when it comes to new solutions in 2023.

That is according to Joey Tang, managing director, head of funds and alternative investment. While interest among U/HNWIs in private markets has been rising, he pointed out that these assets are still dominated by institutional investors. Given that, Tang believes that caution and client education are essential.

“We worked closely with one partner by launching a successful private debt transaction deal which was closed last March. In 2022, the solution managed to deliver a higher than mid-single digit positive return to our clients, despite [the fact that] the market was tough,” Tang told Asian Private Banker.

For 2023, he believes there are still market uncertainties. “Market neutral strategies make a lot of sense to clients’ portfolios with the objective of achieving an absolute return regardless of the market condition and yet diversify portfolio risks,” he said.

One debate that has been raging in the alternatives space is liquids versus semi-liquids. This issue has gained much publicity following Blackstone’s decision to gate withdrawals from its US$69 billion real estate income trust (BREIT) in January, as the private equity firm faced a surge in redemption requests from investors.

Tang, from his perspective, is less keen on semi-liquid alternatives. “Liquidity is a very important element for all clients, but at this stage, however, we are looking at something other than semi-liquid strategies,” Tang explained.

Differentiation via exclusivity

In terms of new products, Tang said the bank is taking a step-by-step approach: “We are not looking for quantity but quality, with the three key philosophies in mind: forward-looking, fill-the-gap, as well as differentiation via exclusivity,” Tang shared.

This year, Tang explained that some of the bank’s clients remain quite risk averse given the volatility recently experienced in markets. “For 2023, we plan to launch a couple of capital market solutions, such as principal protected transactions with potential upside,” he said, without providing further details.

Risk and return

In addition to the private debt deal, the bank in 2022 launched a liquid alts fund (merger arbitrage, with a global coverage and a focus on the US market) which experienced a positive return since it was launched (versus a drop of ~18% in both global and US equities in FY2022).

The bank also launched a recovery convertible bonds solutions for clients, which outperformed the benchmarks.

“Last year, we recommended our clients to avoid the fixed income market as an increasing duration risk was seen in 2022. And lately, given that inflation and interest rates seem to have peaked, it makes sense to look into investment grade bonds again, from the risk and return perspective,” Tang said.

Healthy AUM growth

The focus on alternatives among private clients in Asia has been sharpened amid recent volatility in public markets.

In 2022, Wall Street’s S&P 500 suffered its seventh-worst year since 1926, with the index down 18.1% (including dividends). Investment-grade bonds had their worst year ever, with the Bloomberg US Aggregate Index down 13.0%, according to industry data.

Despite that tumult, Tang said that BOC(HK)’s overall AUM still saw healthy growth last year, without giving a figure.

“Over the last couple of decades, we have seen only a few times that both equities and bonds went south, and a traditional 60:40 portfolio went down by close to 20%, which was very challenging for clients last year,” Tang explained, adding that Q3 was the worst quarter of last year.

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