The jury is still out over the recent complicated split of HSBC's asset management divisions. Whatever the component parts are called, advisers are keeping tabs on a small but growing number of absolute return funds offered by the 'world's local bank'. There is more going on behind the scenes, say the bank's Charles Morris and Will Bartleet, who manage the HSBC Global Trend Fund.

A sharp contrast of old world, wood-panelled banking hall and modern day glass and steel, 78 St James's Street is home to HSBC Investments, the bank's wealth management division. Within it, Charles Morris and Will Bartleet are celebrating the first anniversary of their co-managed absolute return Global Trend Fund.

It has had a low profile in the outside world, although distribution via HSBC's worldwide network means funds under management already hover just short of $300 million. Investors include charity groups, the odd rock star or two, footballers and Kenyan 'old money'.

With an eclectic client list, the HSBC Global Trend Fund is a funny beast and one that is hard to categorise. Its aim is to return LIBOR + 2% and to be quite dull, both managers insist.

But a blend of direct equity, obscure in-house and external funds and constant chopping between asset classes, makes it anything but boring.

Charles Morris, head of absolute return strategy, says the fund came about 10 years ago when the wealth management business was vastly different from today.

He says: "A decade ago, the wealth management business meant stock broking. Then it meant fund management with a low tracking error in 1999. Now, everyone has realised it means 'let's just look after your money and ignore the index'."

Morris thinks the industry forgot what clients wanted: "You have worked hard to build up your fortune and it is our job to protect and preserve it. That is all," he says.

The Global Trends Fund is a Dublin-registered vehicle that makes full use of a wide arsenal of asset classes to achieve absolute returns and to protect and preserve the money that investors have spent a lifetime accumulating, says Johnny Arthur, investment director at HSBC.

Morris says there is no cleverness to the fund's strategy. "We only want to invest in things that are going up. It is really very simple. It is also about taking no risk at all or about taking risk because there is a very good reason to do it."

With this all in mind, Morris expects some major market falls this year. The fund is highly defensive at present, with already high cash levels of one third rising to 45% of the portfolio in a relatively short period of time.

Equity exposure is low, particularly to the US market, and commodities are being played out through a single position in Merrill Lynch Gold & General fund.

The gold position is being wound down as Bartleet and Morris feel the fund has done almost too well, doubling since they bought into it.

Within their large cash position, the pair are playing safe on the bond front.

Morris explains: "We owned bonds until two or three months ago, but that is no longer the way to go. About three years ago we had a fund of junk bonds but then switched to emerging market debt. We switched again 18 months ago to emerging currencies."

Detecting the long-term declining trend for the US dollar, Morris says it is obvious that emerging market currencies will be on the up for a long while yet, adding "The dollar had a nice jump in 2005 thanks to tightening, but that is over now. You can see it is absolutely dying."

Controlled downward pressure on the dollar will have far less of an impact on the baht and ringgit than the Asian financial crisis, or even on the Russian rouble or Brazilian peso, both already doing well thanks to the strong energy and commodity markets.

Morris is also a big fan of HSBC's own Sinopia 300 fund, a name unlikely to ring any bells with UK intermediaries.

Sinopia

Sinopia is the asset management branch of French bank CCF, acquired by HSBC in 2000. It specialises in quantitative strategies and its bond fund uses long/short positions to play off differences in government bond markets around the world.

As positions are matched one to one, Morris says the fund is a good example of gambling less for better returns.

He says: "The consistency of the fund is very, very good. We would much rather hold this than direct bonds. We have got the same risk as a single four- or five-year government bond but with much higher returns. Yields are typically 7% to 8% after fees."

For the time being, Morris is holding off playing the bond market directly, although he would normally expect the desk to take a few positions per year.

"They still have a bit of a way to fall but indicators are that equities will fall a lot further at some point. A 10% to 15% correction is likely and we are in position for that scenario," he warns.

Equity positions have been falling, from an already low 20% of the portfolio to 12% or so today.

Reducing equities is not being clever, says Morris, just about being careful. He says: "Equity valuations are still on the wrong side of cheap. The largest correction will be in the market with the highest valuations, America."

The biggest single theme today is the fund's huge underweight US position. It currently represents around a fifth of its comparable index weighting. The combination of poor equity market performance and a declining currency do not bode well for the US, claims Morris.

"The big macro idea is keeping America underweight and don't call the bottom any time soon." He warns the two factors combined could lead to asset dumping and severe losses for over-exposed US investors," he adds.

In other equities, as with other asset classes, Morris's favourite plays are to buy stocks when they are severely oversold.

He says: "We think there is a huge relation between quality and trend. Conversely, there is no relationship at all between trend and value. Something that has gone down is not necessarily cheap, something that has gone up is not expensive."

The strategy is simple. Stick to large, liquid stocks (typically with market caps of more than $3 to $4 billion), where the market is more likely to know everything and therefore not surprise you. From this universe, pick out those that are already going up.

Morris describes his momentum approach as pretty basic, saying "Quality stocks are a lot more consistent than people think. They don't just rise then explode. They go up and then they keep going up."

In his words, he would rather use a machine gun to pick off front runners, than have to use a sniper rifle to pick off individual special situations or contrarian stocks at the opposite end of the spectrum.

Earlier this year, Morris ditched the likes of Google, Apple and Gazprom as they over-extended. But he was wrong footed by an index break-out in Japan, where he had taken four hefty positions at the end of 2005.

His notion that the market knows everything about big liquid stocks took a knocking with the downfall of Livedoor, the Tokyo-quoted internet company. Morris had little time to bail out when the stock lost 80% of its value on fraud allegations.

He points out: "Bad stocks are much more erratic and volatile. Each one has its own problems and that is fraught with danger."

Quantitative filters are used to identify which stocks are the strongest. These are then looked at again for trend characteristics. The GTF fund looks at 2,250 stocks around the world, each with a market capitalisation of over $3 billion.

The fund is not completely free of straitjackets. The global equities portfolio typically holds 80 best ideas, but country limits of 30% apply for global emerging markets, 10% for non-G7 countries. And only 15% may be held in any single sector.

Morris remains long in G7 countries, short elsewhere. He has strong positions in oil services and industrials – wires, turbines and power equipment.

Cautious

Morris admits the fund may be late to the party on occasions, but that is a small price to pay for the cautious approach it takes.

"When things go up, we sort of respond. More importantly, when things go down, we do not respond." He adds, citing the fund's low volatility to the MSCI All World index. Last year, the fund's volatility ratio was 4.2, against 5.3 for passive funds and around 10 for equities.

Since launch in May 2005, the fund has risen 32.1% against 20.5% for the MSCI World Index. Alpha has varied from 2.1 in the last quarter of 2005 to 4.0 in the first of this year.

The alternative asset section of the fund is important and has changed direction to boost the ability of hedge fund holdings to counter swings in equities and other traditional asset classes.

Co-manager Will Bartleet, who runs the alternative portfolio, explains. "We invested through fund of funds originally, hoping for a low correlation to bonds. But among them, we found a growing correlation to equities."

With hindsight, it is easy to see why this should happen, he says. In an equities bear market, hedge managers rely on stocks rather than other strategies. But herding is not what investors want, argues Bartleet, as stockmarket events of last October and more recently proved.

"They were all following the same trend and they all fell together," he adds.

As a consequence, the Global Trend Fund has moved to more specific underlying hedge strategies that are far more easily controlled.

"We have a fund of CTAs (commodity trading advisors) which is pretty unique. It is high volatility, but at least it is doing something very different to the rest of the market," Bartleet says.

The HSBC Trading AdvantEdge Fund is a concentrated fund of traded managed futures. Futures are traded in equities, bonds, currency and commodities.

While its lack of correlation is an attraction, volatility limits the amount Bartleet is willing to commit to the fund. It currently occupies around 3% of the fund, compared with the 7% occupied by the less volatile Sinopia long/short bond fund.

Bartleet also has a tech play, via the HSBC Global Technology Alpha fund, with long/short plays in Europe, Australia and the Far East. Net exposures are low as the sector relies on 'creative destruction' to drive forward, says Bartleet.

"Net exposure is low, so we do not require the market to actually go up. Tech is the perfect example of a constant cycle of creative destruction. Stocks tend to come from nowhere and then explode."

HSBC admits that intermediaries have not been a high priority in developing the market for the fund, 99% of all flows into the GTF have been through the bank's own distribution channels.

Advisers have been far keener on HSBC Republic's European Absolute and Global Absolute fund of hedge fund products. But with life companies, including Canada Life and Zurich, wanting to put the Global Trend Fund within their own wraps, it will not be long before the fund reaches a wider market. wealth