There is a need to bridge the gap between the emerging Chinese asset manager's desire to embrace the offshore world and their relevant inexperience, this article argues.

WealthBriefing has partnered with UBS to research the external asset manager (EAM) sector in Asia, and has launched an extensive report on its development – of which this feature is part. (To to see previous features in this series, click here and here. To register for the report, scroll down to the field below.)

EAMs hold out tailor-made investment solutions as a big USP. One trend that will be on the radar of those serving the Chinese ultra-high net worth segment is growing interest in offshore fund vehicles as wealth preservation moves higher up the agenda. Here, Mark Hedderman, chief executive, and Tony Kan, managing director (Hong Kong), of Custom House Global Fund Services, explain how the funds sector is rapidly evolving in response.

One of the more interesting aspects of being part of a global business is the opportunity to see macroeconomic trends emerge and witness how they are shaped by the social and cultural values that drive them. Today, one of the most significant of these is the flow of domestic Chinese wealth to offshore investment structures. The technical fundamentals of this alone are worth consideration, but the real intrigue lies in the desire for a reflection of the same cultural principles that govern the domestic business environment.

There has been a massive amount of wealth generated in China over recent years on the back of an economy that has seen unprecedented growth. There is a desire to preserve that wealth by diversifying into global investment opportunities and escape the concerns of future lower domestic growth and potential currency devaluation. UHNW individuals are seeking opportunities to de-risk their portfolios, create succession planning solutions and participate in more regulated and global markets. 

There is concern and uncertainty around traditional asset classes such as Chinese A shares and a potential insurance against this is to gain access to a wider choice of opportunities via the global markets - and specifically via offshore investment vehicles. As a result, we have seen a significant increase in the number of family offices created to facilitate these demands. A concomitant growth in the use of advisors more in the Swiss EAM mould might also be expected for those not quite at family office levels of wealth.

Chinese family offices
In many cases, Chinese family offices are the offshoots of large-scale domestic institutions that have specifically been set up to provide access to offshore vehicles for their UHNW clients. These individuals are, in many cases, large industrial tycoons who have amassed assets at home over the past 15 to 25 years. They then come to the point of seeking alternative solutions to preserve and increase that wealth. 

The proximity of an established location like Hong Kong and its return to Chinese governance in 1997 was one of the catalysts for the progression towards the situation that we have today. Right on the Chinese doorstep was the ability to gain immediate access to a financial services centre perfectly suited to meet the demands of those who wished to venture into the global financial markets. Since then, there has been a decentralisation of this activity to locations such as Shanghai and Shenzhen, who are increasing their sophistication and act as regional gateways from mainland China to the offshore world.

Therefore, the perfect environment was created for what we have seen evolve today.

Don’t underestimate cultural differences
This evolution of wealth generation and protection is something that we have seen before around the world, but what is unique in this situation, is how the values of the Chinese culture are impacting on the provision of services to this traditionally western offshore investment model. What we are seeing is the collision of two worlds that have arrived at this point from very different backgrounds.  

Offshore jurisdictions such as the Cayman Islands offer established vehicles that have been used by Europe and the West for some time now. However, for a lot of Chinese firms and fund managers, this is their first foray into the offshore world. In many cases, these managers may be spinning out from large local institutions, either in total or as part of a family office, as mentioned previously. As with many features of this trend, this has resonance with how the market operates outside of China, but whereas the emerging manager in the US or Europe will typically be familiar with how the offshore world operates and functions, it is not necessarily the case with their Chinese equivalent.

This presents a unique challenge and opportunity for all players. There is a need to bridge the gap between the emerging Chinese asset manager's desire to embrace the offshore world and their relevant inexperience. It is here where the differences between the cultural nuances and how they relate to the market environment are at their sharpest. The service provider industry for the offshore world is a mature one that has been subject to decades of transformation and development. It is highly competitive and the differentiation between the participants can be hard to appreciate for those unfamiliar with the market.

There is a long list of firms who have failed to “crack” the Asian market, with a failure to appreciate local custom and business decorum cited typically to blame. Many have found to their cost that business etiquette is not universally transferrable.

An educative role 
We have an emerging market that is driven by a traditional economy which has experienced rapid growth in recent times and is at the point of its development where it evolves to the offshore vehicle. This market itself is a highly competitive and developed one, but it has to show patience and understanding to its newest participants.

Those entering the fray to provide external asset managers with the sophisticated investment tools they increasingly require need to remember that culturally a collaborative approach works well. Yet always remember the education piece must be carefully calibrated to occur in a certain manner and at a certain pace.

Our 15 years of experience has taught us that in China, the decision-making process is longer, personal integrity is everything and respect between parties is paramount. The familiarisation that exists in a mature market - which allows for the rapid arrival at decision-making - just is not there.

We see the evolution of Chinese offshore fund vehicles rapidly accelerating in the next few years as demand from Asian clients grows. As it does, one of our key aims is to help bridge the gap in understanding between the offshore world and the experience to date of the EAM in China. Better enabling advisors to articulate the offshore fund proposition to their clients will be key to our sector’s growth.