How Sun Hung Kai & Co uses hedge funds to protect capital

Sun Hung Kai & Co is prioritising staying liquid and preserving capital via hedge fund investing as it navigates an uncertain and volatile market outlook,  a senior investment executive told AsianInvestor.

“Very few can accurately predict what the markets will be doing in a year or two from now. Therefore, we prefer to take a probabilistic approach of building a portfolio for varying scenarios,” said Allen Sing, managing director of Sun Hung Kai Capital Partners.

Sun Hung Kai Capital Partners is the fund management arm of Sun Hung Kai & Co, which is controlled by chairman Lee Seng Huang's family, serving as the family’s de facto investment vehicle. It specialises in alternative investments across private equity, private debt, hedge fund, and real estate.

The firm prefers equity neutral, arbitrage, and discretionary macro hedge funds, and is closely watching the distressed space for the next six to 12 months.

Sing oversees a $320 million hedge fund portfolio. He stressed that it is an important time to have hedge funds in the portfolio because of how challenging and volatile the equity market has become.

“I believe the environment of the prior 12 years where one can buy equities and bonds on a long-only basis has passed,” Sing told AsianInvestor.

“We want to invest in managers whose first and foremost job is to protect capital, then focus on generating returns.”

Sun Hung Kai & Co’s hedge fund portfolio consists of a select group of external global hedge funds with a bias towards Asia, and allocation to stable managers with relatively low market correlations.

As of June 30, SHK & Co managed about HK$16.3 billion ($2.1 billion) in investment assets, according to the firm's interim results announced in August. In addition to asset management, Sun Hung Kai & Co also operates a consumer financing business.

The firm is unrelated to Sun Hung Kai Properties, from which the Lee family acquired the business in 1996.

Sing actively manages a multi-manager hedge fund portfolio on behalf of SHK & Co and external clients. Year to date, the portfolio has generated single-digit returns.

Meanwhile, the group makes separate, earlier-stage investments in hedge funds which have a different risk and return framework. This segment contributed to the group’s overall 5.7% loss in hedge fund investments in the first half of 2023, due to positions in equity long biased and global credit strategies. 

“We expect the portfolio to be positioned more conservatively going forward, given the expectations for ongoing market volatility. The pipeline is exceptionally robust, with a number of high-quality managers being evaluated for potential investment,” the interim report stated.

CREDIT RISK

Sing stressed staying in liquid strategies. “In the scenario where markets or strategies make a turn for the worse," he said. "We want to avoid those left tail risks, which can turn into surprising outsized losses."

Noting the top performers in the past year included equity market neutral, tactically oriented multi-asset, and alpha-generating equity long/short managers, Sing said they shared avoiding material equity risk for outsized returns.

Hence, the firm will continue to focus on protecting capital through equity market neutral, arbitrage managers, discretionary macro, and tactically oriented multi-asset class.

According to data from fund services provider Citco, the year-to-date return of hedge funds globally was 8.1% as of end-September. Returns stagnated in the third quarter, while return levels also varied among different strategies.  

Sun Hung Kai & Co's hedge fund portfolio as of June 30, 2023 (Source: Sun Hung Kai & Co)

According to Sing, the team is also watching closely the distressed space and noting potential opportunities from interest rate hikes impacting private credit cyclically.

Sing said he sees risks from loosely underwritten loans outside the banking system.

While assets continue to flow into the sector, Sing thought the economic slowdown and high rates is not yet reflected, which is a potential risk.

“Private credit is a diverse space, and it wouldn’t surprise me if the weaker segment experienced some material losses ahead,” he said, noting that the repricing of the credit market could cause severe market moves.

ALSO READ: Nan Fung, Sun Hung Kai & Co branch out to multifamily services

He acknowledged that safe, diverse investments could do well and pay back investors accordingly. A source of worry is the risky pockets where investors have been getting coupons and have not taken mark-to-market losses.

Sing also warned of the "gravitational force" of higher interest rates on markets globally, believing its effects were yet to fully materialise with hot money still inflating prices.

He likewise noted the unpredictable impacts of geopolitics.

Sing said giving a market direction call or investing on a fundamental basis in Greater China over the coming six months is improbable, given that the markets are not functioning normally due to geopolitics, market sentiment, and fund flows.

The story has been updated with additional details on the structure of Sun Hung Kai & Co and its hedge fund portfolios.