Algebris eyes Japanese banks and Chinese cocos

Japan will continue to offer appealing investment opportunities this year, particularly in the financial sector, says Algebris Investments, a UK-based hedge fund manager with $1.5 billion in AUM.   

The firm started taking long positions in the Japanese market in November 2012 – ahead of the launch of the Abenomics financial stimulus programme – at a time when “even the Japanese said, ‘you’re crazy’,” says Algebris chief investment officer Ivan Vatchkov.

Japanese banks will benefit from the government’s monetary stimulus plan, Vatchkov tells AsianInvestor. “They own a lot of equities and will see expansion in their lending books.”

Algebris runs the long/short Global Financials Fund and long-only Global Financials Income Fund, both of which invest in the equities and credit of financial institutions such as banks, brokerages and trust companies worldwide.

The Global Financials Fund gained 60.6% in 2013, while the Ucits-compliant Global Financials Income Fund, launched in August, yielded 8% in the first five months of trading.

In Asia, Algebris has also been keeping a close watch on the development of the contingent convertible – or ‘coco’ – bond market in mainland China. The instruments are used by banks to raise money to satisfy capital requirement ratios under Basel III rules.

Algebris has taken positions in tier 2 capital instruments of Chinese institutions – which have offshore operations – that have coco elements, says Vatchkov, without naming specific lenders.

“As investors, we find it a very attractive way of gaining exposure to the Chinese banking system because it affords us a level of protection that is much better than equities,” he says.

Since 2009, major European banks have been issuing the hybrid bonds, with total issuance forecast to reach between $75 billion and $100 billion this year. Chinese banks have been slower to make a foray into the market, although issuances are expected to rise gradually.

In July last year, Tianjin Binhai Rural Commercial Bank issued China’s first Basel III-compliant cocos, raising Rmb1.5 billion ($247 million). These taken up by to a domestic pool of buyers – primarily high-net-worth investors.

It was followed in October by ICBC (Asia) – the Hong Kong subsidiary of China’s biggest lender, Industrial & Commercial Bank of China – which raised $500 million through the first dollar-denominated coco issuance by a mainland bank. 

Algebris is “more cautious” of coco issuances by smaller, onshore mainland banks, says Vatchkov. China's largely closed capital account "makes it a little bit more difficult to source liquidity", he adds. “While China is relaxing the flow of capital rules quite substantially and are making good progress, for now the offshore issuance is far more interesting.”

Algebris runs a coco-specific strategy, the $1 billion Global Financial CoCo Fund, which was up 10.97% in 2013 and 143% since its 2009 inception.

While Asian ultra-high-net-worth (UHNW) investors and private banking channels have been notable buyers of cocos issued by banks globally, there are signs these instruments are gaining traction among institutions.

The Algebris Global Financial CoCo Fund has seen its investor base expand to include more institutions, including sovereign wealth funds and insurers from Asia (including the Middle East) and the US. A sizeable portion of the strategy’s early investors were UHNW individuals.

Pre-crisis, “institutions used to dominate the hybrid [bond] space", says Vatchkov, “and they are starting to return”.