Chinese hedge fund start-ups set out plans

Jul 14, 2016

In the second of a two-part article about early-stage mainland asset managers setting up in Hong Kong, senior executives from two firms explain their business strategy.

Chinese hedge fund start-ups set out plans

Amid the raft of Chinese fund houses looking to launch operations in Hong Kong, some start-ups are choosing to join incubation platforms in the city in order to build a track record and scale, with a view to seeking a licence from the local securities regulator down the line.

Two such firms are Beijing’s Redhorse Fund Management and Shenzhen-based Academia Capital Management.

Academia plans to launch its first offshore hedge fund in Hong Kong this year, said Charles Wang, the firm’s founder and chairman. It will be a quantitative strategy investing in A-shares and H-shares. Academia may expand the investment scope to Asia Pacific equities after a few years once, he noted.

Wang expects the fund to raise AUM of $30 million to $100 million, comprising the company’s own money, along with assets from one or two European or US investors. Academia is looking at joining an incubation platform, and one possibility is Oriental Patron Investment Management (Opim).

"There is a lot of work to do to set up a company, and these are things that fund managers are not willing to do," said Wang. "Opim can help us save time on this routine stuff, [so that we can] focus on research and investment."

He told AsianInvestor he had already planned to make global investments via Hong Kong when he was setting up Academia Capital in 2014, given the fervour of Chinese investors to boost their offshore exposure.

Wang’s plan is to establish the business’s brand, strategies, performance and track record, taking the view that it would then be able to attract various sources of capital, including from Chinese and foreign individuals and institutions.

He has experience of quantitative investing in the US, having worked at Putnam Investments and Acadian Asset Management, both based in Boston. For example, he ran the Acadian Global Emerging Markets Portfolio from 2000 to 2009.

Since returning to China in July 2010, Wang has served as chief executive of E Fund Management (Hong Kong) and as chief investment officer for ETF and quantitative investment at Bosera Asset Management in Shenzhen. He registered Academia Capital in October 2014 and started operations in 2015.

Wu Yongtao, Redhorse Capital Meanwhile, Redhorse set up its first offshore fund in Hong Kong through the Opim platform in May with $6 million in assets, sourced from four high-net-worth (HNW) clients in China, including lawyers and entrepreneurs. It is a global macro strategy that will go long on commodities and dollars and short on European and US equities.

“We are taking the very initial step in overseas investment, so didn’t onboard too many assets at this stage. We need to build our track record first,” Wu Yongtao, Redhorse’s chief investment officer, told AsianInvestor.

Wu (pictured left) said a lot of his hedge fund manager friends in China were eager to set up businesses in Hong Kong, but were not finding it easy.

Typically it takes about six months to start a hedge fund, which may cause managers to miss the best timing to enter the market.

Managers can use three potential structures – Ucits, stand-alone or the segregated portfolio company (SPC) model – and need to set up a Cayman-registered company to join the Opim platform.

Redhorse launched its Hong Kong fund through Opim’s platform using the SPC structure, which can shorten the launch period to six weeks and allows a lower AUM threshold of about $5 million.

Chinese investors have developed more reasonable return expectations and a better sense of risk than in the past, said Academia’s Wang. In the two years since quantitative investments have taken off in China, most managers typically delivered around 20% annualised returns, he noted.

Despite these returns, last year's equity market bubble followed by the crash led onshore investors to appreciate the inherent risks in China's stock market. That has led them to increasingly consider diversifying into offshore investments.

Absolute-return strategies are now seeing the greatest demand among wealthy Chinese clients, Wang said. Investors tend to be most attracted to stable, high single-digit returns, he added.