UBS's Asia Hedge Fund Clients Raise Short Bets 30% on Mixed Economic Signs

Date: Monday, September 20, 2010
Author: Bei Hu, Bloomberg

UBS AG’s hedge fund clients in Asia have increased short bets on stocks three times as fast as their long holdings this year amid conflicting views about the global economic recovery.

Outstanding stock shorts of local and global hedge funds trading in Asia have grown by 30 percent in 2010 and their long holdings have expanded by about 10 percent, said Lynden Howie, the largest Swiss bank’s head of equity finance in the region. Shorting involves borrowing and selling stocks in the expectation of buying them back later at lower prices.

“While our gross balance has increased, the percentage split of long and short balances has varied widely through the year,” said Hong Kong-based Howie in an interview Sept. 17. “That’s just consistent with the lack of conviction that the client base has experienced through 2010 due to the volatile markets.”

The MSCI World Index lost 1.1 percent this year and its 100-day volatility, a measure of price swings, has almost doubled since April to the highest level in a year amid concerns that the European debt crisis would escalate and the global economy would stall.

Warren Buffett was among investors who ruled out a double- dip in the U.S. economy, pitting him against economists such as New York University professor Nouriel Roubini and Harvard University’s Martin Feldstein who warned the odds of another recession may be one in three or higher.

The HFRI Fund Weighted Composite Index rose 1.7 percent this year, headed toward the third-worst return since Chicago- based Hedge Fund Research Inc. began tracking the data in 1990.

Delta One

Asian hedge funds’ long holdings still outweighed short bets, Howie said, a trend that he believes will continue in the current investment climate.

Howie’s team provides so-called Delta One services including stock loans to hedge funds and instruments such as swaps and equity-linked notes that allow them access to restricted markets such as China and India.

They also offer so-called synthetic prime brokerage services which allow investors to trade in a market without having to own the securities. They provide swaps on industry groups within an index and on customized baskets of stocks.

UBS hired Ryan Nelson to run Delta One sales. He was former head of Delta One sales at Nomura International with a research background and experience in developing products for hedge fund clients, said Howie.

“Historically stock loan desks were reactive in nature,” said Howie. “Increased market competition, balance sheet usage and the challenging markets has led our client base to look increasingly to our Delta One desk for idea generation. Quite simply this requires a bigger team.”

Stock Loans

UBS also recruited Sean Huang, a Mandarin speaker, from Fortis Bank SA to develop products, especially those related to developing markets like China, Taiwan and India.

Huang’s primary responsibility will be to help develop products for stock loans and short selling once international banks can offer them in China and India, Howie said.

Taiwan already allows borrowing of stocks from local and international lenders yet restrictions remain, such as onerous collateral requirements, Howie said. UBS is expecting such requirements to be relaxed.

UBS moved Daniel Sofianos from London to Hong Kong to run its Asia stock loan business. Sofianos, who had been based in Asia for UBS, worked on hedge fund sales in London for the Swiss bank before moving back to Hong Kong.

He will be responsible for building up UBS’s stock loan inventory and distributing that to local hedge funds and global hedge funds operating in Asia, Howie said.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net