Gilbert Tse

Heading Lyxor in Asia across broad regional variations

Originally published in the April/May 2014 issue

It has been just over a year since Gilbert Tse was appointed head of Asia at Lyxor Asset Management, overseeing the whole of Lyxor’s business in the region. He came from within the extended group having spent the previous three years at Fortune SG, a company owned 49% by Lyxor Asset Management and 51% by Baosteel Group with, at that time, some 36 billion renminbi ($5.5 billion) under management.

It was while he was at Fortune that Tse started working on absolute return products for Chinese investors, having spotted that the less than positive returns on equities in the country were beginning to stifle investor enthusiasm for the investment sector. In an attempt to meet that demand, in August 2011 Fortune brought out an absolute return product developed in-house which went long the portfolio of an enhanced index in an effort to beat the CSI 300, creating what was in effect a product based on a market-neutral strategy. The success and popularity of this led to a CTA product in collaboration with Winton Capital – the first CTA product available in domestic China – based on the Chinese futures markets of just over 20 futures contracts on the four Chinese futures exchanges, mostly based on commodities but also one financial future. This product was filled immediately.

Globally, Lyxor manages $115.2 billion in a four-pillar business model. Its first pillar is in ETFs and index funds where it stands at third place in Europe by assets under management. The second pillar is the managed account platform that hosts over 100 hedge funds, offering investors liquidity and transparency (95% of the products on the platform offer weekly liquidity) and access to Lyxor’s operational and investment due diligence.

The third pillar is the structured investment products business line, run as a joint effort with parent company Société Générale, while fourth comes the active quantitative specialised investment products, offering multi-asset and quant strategies and European credit long products. Tse is head of Asia forall four types of product and manages two operating centres, one in Japan, one in Hong Kong plus one subsidiary company, his old home at the Fortune joint venture in Shanghai.

“I would say that Asia is a very fragmented market,” he says. “There are very different environments in different parts of Asia. In different countries you could have a very different landscape.”

As an example, he finds that pension money in Japan is very consistent in its demand for alternative investment products while in most of the other Asian countries there might only be a couple of big institutional clients prepared to invest in alternatives. “In Korea you see institutional interest from insurance and pension companies while in Hong Kong and Singapore it is more private banking, high-net-worth and family offices who are interested,” he says.

And so far China is still at a very early stage when talking about investing in overseas investments at all. The Winton offering Tse worked on at Fortune was snapped up and the firm subsequently launched a couple of other CTA products in the country. However, a fondness for CTAs in China is more availability-led than driven by desire for the strategy.

“We are talking about domestic investment strategies’ constraints,” he explains. “It’s more about what you can do in the local investment market.”

Going short equities in China is allowed in principle, yet liquidity is far from satisfactory. “Trying to do long/short equity in the domestic Chinese market is very difficult to implement,” Tse says. “It’s more about the availability of investment tools.”

Tse reports that good progress has been made with onshore strategies. “China is in a phase of deregulation. There has been talk that soon there will be equity and index options in China and if that happens the liquidity will improve and with that back-drop more alternative investment strategies will be able to offer opportunities to investment managers and investors. We are probably at a point where we do expect to see more and faster growth in the alternative investment area in China.”

The Lyxor Chinese business with Winton Capital proved so popular that they started working with local investment advisers. They have worked with a local CTA, Chi Ying, since 2012. “We have launched three transactions with this manager altogether which shows that both the strategy and products are receptive to investors in China, and we managed to work with different distributors to offer the products to high-net-worth investors in China,” Tse says.

A surprising development has come out of the growing domestic CTA business in China. “I would pinpoint one thing,” Tse says. “For the few CTA strategies in China we have observed that the performance is quite different from that of global CTA strategies.”

The CTAs that Fortune launched in August 2012 have had satisfactory performance while the CTA community on a global scale has been virtually decimated with what Tse politely calls ‘ups and downs’.

“Somehow domestic Chinese alternative strategies give de-correlated returns,” he says. “Even though global investors may have difficulties getting to Chinese domestic strategies, restrictions can be relaxed in time and de-correlated returns could certainly help in portfolio optimisation.”

Looking to the wealth-driven investor groups from Hong Kong and Singapore, Tse has observed that since the middle of last year he has seen them switch from high-yield products to other products which could offer a more stable return, including alternative investment products. “We are seeing a net inflow from these groups and a few strategies are of interest such as global macro, equity long/short and event-driven,” he says.

Emerging Asian alternative managers are also part of the Lyxor focus through the managed account platform. “We are in touch with regional managers in Asia,” Tse says. “When you look at the investors on the managed account platform, many of them get their Asian allocation through the platform.”

The firm is also working with regional talents in alternative investments looking for opportunities to bring them on board and offer investors more investment solutions. “Growth has slowed down over the past few years but is probably coming back now because we have seen better inflows since the middle of last year, so we are seeing another phase of growth in alternative investments in general,” Tse says. “The main interest is still global but in selected local markets we also expect to see the development of local investment managers.”

Tse cites Korea, where last year’s changes in local regulation encouraged the development of a domestic hedge fund market: “All in all we believe that there will be increasing demand for alternative investment products globally but also local developments in selective places,” he concludes.