UBS prime brokerage sees strong Asia growth

HONG KONG (Reuters) - Switzerland's UBS (UBSN.VX), which more than doubled the amount of assets serviced by its Asian prime brokerage business last year, expects that figure to grow at 50 percent annually going forward.

Global investment banks, led by Goldman Sachs (GS.N) and Morgan Stanley (MS.N), are competing fiercely for a share of Asia's rapidly growing hedge fund market, which has now exceeded $140 billion in assets under management, according to industry research group Eurekahedge.

UBS is bulking up its prime brokerage offices in Tokyo, Hong Kong, Singapore and Sydney after its assets under management held by its hedge fund clients grew 108 percent in 2006, its regional chief said.

"We should be comfortable seeing a 50 percent growth in our business every year," David Gray, head of the bank's Asia Pacific prime brokerage told the Reuters Hedge Funds and Private Equity Summit in Hong Kong on Wednesday.

Gray declined to disclose the division's current assets under management, but he plans to grow the team of roughly 65 people rapidly to keep up with the growth of UBS clients.

"We'll tend to see growth of 10 per year just to keep up with capacity," he said. "The market's growing at 35 to 40 percent per annum. If your business isn't growing that fast, you're not even keeping up."

Asian hedge funds have focused on China, India, and also opportunities in more developed capital markets like Japan and Australia. Some analysts have estimated global hedge fund assets have risen to more than $2 trillion.

GLOBAL PLAYERS

Asian funds have become much larger as global players like Citadel enter the region, upstaging a market where most start-ups raised $20 million to $50 million a couple of years ago.

"They're now starting out with $100 million, $200 million," said Gray, who took up his current role last month, after serving as head of Australian prime brokerage.

"You're seeing $1 billion funds, which a few years ago you never would have contemplated."

Abax Global Capital Ltd., which has been set up by former Citadel executives, is reportedly set to become the first Asian start-up fund with more than $1 billion in assets.

Hedge funds in Asia are also diversifying beyond the predominant long-short strategy, where a manager can sell some stocks short in the expectation that its price will fall.

"The long-short is quite healthy. However, the event-driven space is definitely going good, and also the special situations funds," said Gray.

Hedge funds are increasingly acting more like private equity funds by taking bigger stakes in companies and becoming more active in management, as certain strategies like convertible arbitrage become overcrowded, market watchers say.

There is also a move to new products outside the realm of equities. UBS has set up a fixed income prime brokerage platform in the United States to service funds investing in securities like collateralized debt obligations, which are backed by credit derivatives.

UBS should roll out the fixed income service in Asia some time during the third quarter of this year, Gray said.

"I think every prime broker worth his salt is looking at that market," he said.