HSBC's Three Decades of Building Hedge Fund Portfolios
Hedge fund investing has become increasingly institutionalized and resource-intensive, requiring access to specialized managers alongside deep due diligence, portfolio construction, risk management, and ongoing oversight capabilities. Managing roughly USD36 billion allocated to external hedge fund strategies, HSBC Asset Management has built one of the world's largest multi-strategy hedge fund platforms, with its flagship fund of hedge fund strategy marking its 30-year anniversary this year.
The strategy offers insight into how the team approaches manager selection, portfolio construction, and strategic allocation decisions. The strategy offers diversified exposure to approximately 25 to 30 underlying hedge funds across several broad strategy categories, combining top-down macro views with bottom-up manager selection. Behind the strategy sits HSBC Asset Management's global hedge fund research platform, which forms the foundation of the investment process and supports both customized institutional mandates and the flagship fund of hedge fund strategy.
A Global Research Platform Screening Thousands of Managers
"The engine room from an investment point of view is really the research team," explains Tim Gascoigne, Senior Hedge Fund Investment Specialist at HSBC Asset Management's Alternatives business. The broader hedge fund investment platform comprises approximately 42 professionals globally, including more than 20 specialists focused on investment and operational due diligence. These teams are based close to the major hedge fund hubs worldwide and collectively monitor more than 7,000 hedge funds across strategies and geographies.
The manager research process progressively narrows this global hedge fund universe into a curated buy list of around 120 approved managers. The process combines investment and operational due diligence with ongoing monitoring, aiming to identify managers capable of delivering persistent risk-adjusted returns across market environments.
"The objective of the strategy is to provide an interesting absolute return with low beta and low correlation to other asset classes," says Gascoigne. "Since launch, it has delivered around 7.5 percent annualized returns. It is not only about diversification, but also long-term capital growth."
Combining Top-Down Allocation With Bottom-Up Manager Selection
While the research process starts with thousands of hedge funds globally, portfolio construction combines bottom-up manager selection with top-down strategic allocation views. The team groups hedge fund opportunities into broad categories including long/short equity, discretionary and systematic macro, equity market neutral, CTAs, event-driven strategies, and multi-manager platforms. They then adjust exposures depending on the market environment and forward-looking opportunity set.
Once a quarter, we formally assess the opportunity set across strategies looking forward over the next six months," explains Gascoigne. "That assessment is based on internal discussions, research work, and extensive dialogue with hedge fund managers." The objective is to identify where market conditions create more favorable opportunities for specific hedge fund strategies.
The team currently maintains constructive views on discretionary macro and equity market neutral strategies, against a backdrop of elevated geopolitical uncertainty, higher rates, and greater dispersion across markets. According to Gascoigne, the return of a more normalized rate environment has materially improved the opportunity set for several active hedge fund strategies that struggled during the ultra-low-rate period. "As rates have moved away from zero, the cost of capital matters again, which naturally creates differentiation across companies and sectors."
Meanwhile, the team remains broadly neutral on CTAs, viewing them primarily as liquid diversifiers during stressed markets. "We don't pretend that we can forecast the prevalence of trends across markets," says Gascoigne. "But CTAs remain useful because they are liquid, directionally agnostic, and can provide diversification benefits during difficult market environments."
The team also retains a constructive stance on event-driven strategies amid rising corporate activity, and is broadly neutral on credit strategies. Gascoigne notes that spreads have tightened meaningfully, reducing the overall opportunity set in traditional credit. Within the space, the team currently finds structured credit somewhat more compelling, given the ability to move higher up the capital structure while maintaining attractive returns. By contrast, opportunities in distressed credit look more limited at this stage of the cycle, with default activity and broader distress levels remaining relatively subdued.
Multi-manager platforms remain core holdings within the strategy, offering diversified sources of alpha and access to trading teams and strategies that can be difficult to access independently. "Large multi-PM firms have become increasingly important within the industry," notes Gascoigne. "Many leading managers in that segment have been closed for years, which is where longstanding relationships and an established platform can help."
Overall, the team maintains a neutral to positive view across most hedge fund strategy categories, reflecting what Gascoigne views as a more favourable environment for active hedge fund investing more broadly. He points to higher interest rates, elevated geopolitical uncertainty, greater dispersion across markets and rising levels of corporate activity as key factors shaping the opportunity set for managers.
Black-Litterman and Portfolio Construction
Portfolio construction begins with a neutral allocation framework derived from hedge fund industry benchmarks using the Black-Litterman model, before incorporating HSBC Asset Management's own strategic views to tilt allocations toward preferred strategies. "We start with an equilibrium portfolio and then adjust allocations based on our top-down views," explains Gascoigne.
Even so, he emphasizes that manager selection remains the dominant driver of long-term returns. According to the team's internal analysis, approximately 90 percent of HSBC AM's fund of hedge fund strategy's historical outperformance relative to the broader hedge fund composite index has come from bottom-up manager selection rather than tactical allocation shifts. "The vast majority of the value-add comes from identifying and accessing the right managers," he says. "That's really where the persistent edge has historically come from."
Top-down positioning can be particularly important during periods of market volatility. Gascoigne points to 2022 as an example, when the team increased exposure to more defensive "risk-off" strategies such as macro, equity market neutral, and multi-manager platforms amid rising rates and simultaneous weakness across equities and fixed income. "That environment tended to favour strategies less dependent on traditional market beta," he explains. "Having that tilt helped us generate positive performance in 2022."
Scale, Longstanding Relationships, and Access
The hedge fund industry remains highly heterogeneous and operationally complex, making manager access, due diligence, portfolio construction, and ongoing monitoring critical components of successful investing. Having spent three decades investing in the space and built a platform overseeing roughly USD36 billion allocated to external hedge funds, the team believes its scale and longstanding manager relationships provide a meaningful competitive advantage.
According to Gascoigne, access remains one of the key differentiators within the industry. Approximately 70 percent of the holdings in the fund of hedge fund strategy are either hard-closed or soft-closed to new investors, including many of its largest underlying positions. "When you have a product and a research platform that have been established for a long time, you naturally build relationships and access that are difficult to replicate," says Gascoigne. "The research platform is deep, and we also benefit from operating within a large global organization".
This document provides a high-level overview of the recent economic environment. It is for marketing purposes and does not constitute investment research, investment advice nor a recommendation to any reader of this content to buy or sell investments. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. There is no guarantee that HSBC AM Alternatives will successfully pick outperforming managers. There is no guarantee that HSBC AM Alternatives will make similar investments. Past performance does not predict future returns. Diversification does not ensure a profit or protect against loss. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. The views expressed above were held at the time of preparation and are subject to change without notice.
Key Risks
The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. This information shouldn't be considered as an investment advice. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Diversification does not ensure a profit or protect against loss. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Investors in hedge funds should bear in mind that these products can be highly speculative and may not be suitable for all clients. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The return may increase or decrease as a result of currency fluctuations. There are several key issues that one should consider before making an investment into hedge funds. The risks specific to this type of investment may include, but are not limited to:
Regulation
The hedge fund industry is lightly regulated, with the majority of funds domiciled in offshore jurisdictions. Hedge funds are generally classified as "unregulated" and are not typically subject to the same levels of scrutiny and protection as a traditional investment fund. A thorough due diligence process can mitigate these concerns.
Gating
In event that redemptions requests on a particular dealing date are much higher than the normal level and full satisfaction would jeopardise the longer term portfolio balance, a gate or partial execution of redemption requests may be implemented generally on a pro-rata basis.
Side pocket
There may be instances when certain assets in a fund portfolio could become less liquid and the fund manager may segregate these illiquid positions from the main portfolio into a side pocket (or a separate vehicle).
Suspension of redemption
Suspension of redemption is a temporary halt in exiting the fund during a given redemption window. This is a stronger measure than gating because there is no dealing for the fund. This is generally used under special circumstances such as when liquidity conditions have markedly deteriorated in a short period of time or when there are heavy asset outflow such as the loss of a core investor.
Access
Hedge funds operate larger investment minima than traditional investment funds. Investors are often unable to access a hedge fund unless they were willing to invest US$500,000 to USD2 million.
Liquidity
Hedge funds typically have much longer dealing cycles than traditional investment funds. Depending on the strategy being utilised, a hedge fund may only allow subscriptions and redemptions on a monthly or quarterly basis. Furthermore, some hedge funds have long lockup periods, where an investor is not permitted to redeem from the hedge fund unless a period of 6 months, a year or even 2 years has passed. Some may allow a redemption before the lockup period is over, but the investor would have to pay a hefty penalty to be able to do this.
Transparency
Many hedge fund managers are wary of regularly publishing their positions in the belief that this will remove any advantage that they have over their peers. This can pose a problem to the investor, as he or she cannot be certain to which stocks, geographies, markets or even strategies he or she will be exposed to when investing in the hedge fund. However, trusted investors who have built strong relationships with the hedge funds can access this information for the majority of funds, enabling thorough monitoring of the investment.
Manager failure
Over time, a number of hedge funds will close or fail, due to weak performance or operational difficulties. An investor must take this into consideration before making an investment, seeking professional advice to help minimise the risk of investing in a fund that is likely to fail.
Alternatives
There are additional risks associated with specific alternative investments within the portfolios; these investments may be less readily realisable than others and it may therefore be difficult to sell in a timely manner at a reasonable price or to obtain reliable information about their value; there may also be greater potential for significant price movements.
Important Information
For Professional Clients and intermediaries within countries and territories set out below; and for Institutional Investors and Financial Advisors in the US. This document should not be distributed to or relied upon by Retail clients/investors.
The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. The performance figures contained in this document relate to past performance, which should not be seen as an indication of future returns. Future returns will depend, inter alia, on market conditions, investment manager’s skill, risk level and fees. Where overseas investments are held the rate of currency exchange may cause the value of such investments to go down as well as up. Investments in emerging markets are by their nature higher risk and potentially more volatile than those inherent in some established markets. Economies in emerging markets generally are heavily dependent upon international trade and, accordingly, have been and may continue to be affected adversely by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries and territories with which they trade. These economies also have been and may continue to be affected adversely by economic conditions in the countries and territories in which they trade.
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Content ID: D072236; Expiry Date: 31.05.2027