China Everbright makes hedge fund foray

The asset management arm of China Everbright, a financial services company directly under the supervision of the State Council of the PRC, has launched its first hedge fund product. The Dragon Fund, a greater China multi-strategy fund, was launched in early January with $40 million of seed capital invested by China Everbright.

"The fund will have a bias towards the long/short equity strategy but the portfolio will include other instruments such as fixed income and currencies," says portfolio manager Frank Ren.

Ren, a hedge fund industry veteran, joined the Everbright team four months ago to spearhead the new initiative. Previously he was a portfolio manager for RGH Capital, a $1.3 billion US-based macro hedge fund. Prior to that he worked as a hedge fund portfolio manager at Omega Advisors and Barclays Capital and as a fixed-income trader at Goldman Sachs.

China Everbright joins a growing clique of Chinese institutions that have begun launching greater China hedge fund products. Amongst these is Citic Capital, which has developed a series of hedge fund products; Chinese brokerage firm Guangfa Securities, which teamed up with Hong Kong IFA Nobel Apex Advisors to launch a China hedge fund; and Guotai Junan Securities, which joined forces with US hedge fund Apex Capital to launch a greater China hedge fund.

Ren says the fund will initially seek to raise money primarily from Chinese institutional investors leveraging Everbright's relationships and reputation on the mainland. The fund will also be targeting investors around Asia, Europe and the US.

"We believe the institutionalized structure of our business will be attractive to investors. We've a well developed back office and risk management team, and the Everbright business structure has been in place for a long time."

Ren says the fund's performance objective is to return greater than 12% per annum with low volatility and low correlation with equity indices. He expects the fund's strategy to have a comfortable capacity of $150 million to $200 million.

"We can invest in large cap stocks in Hong Kong, Taiwan and Korea and have a greater capacity than just China-focused funds," explains Ren. He says the fund currently does not have the QFII capacity to invest in the China A-share market, but expects to get it in the future. While Ren sees the fund leaning towards a long bias, to take advantage of China's long-term growth story, he expects the fund to maintain a more balanced portfolio in 2005.

"This year, market conditions will be rough, given a slow down in China and a global slow down as well which will put pressure on Chinese exports. There is more short-side opportunity this year."

Ren likes defensive stocks, such as telecoms and utilities. "Earnings are more stable in these sectors and there is less pricing pressure, if anything prices are going up as these sectors liberalize. Fund flows will also benefit more defensive stocks in this environment, traditional investment driven stories like commodities and shipping stocks will suffer."

The fund has appointed Merrill Lynch as its prime broker and HSBC as its fund administrator.