Permal plans Shanghai base amid mainland focus

Launch of China office to follow merger with fellow fund of hedge fund Fauchier, underlining a growing emphasis on the country’s nascent hedge fund market.
Permal plans Shanghai base amid mainland focus

Permal’s merger with fellow UK-based peer Fauchier will create Europe’s largest fund-of-hedge-fund group – one which will have a growing emphasis on China managers, says Permal chief executive Isaac Souede.

A Shanghai office launch is planned this year – pending China regulatory approvals – with the operation providing asset management support in the form of portfolio managers and analysts, says Souede during a visit to Hong Kong this week.

“We’ve got a Chinese fund that’s been up and running for three years and which has performed really well,” he says, referring to Permal’s China Strategy Fund.  

“We want to be closer to the action. And from there we can cover Hong Kong [-based managers] readily. It’s harder to cover China from Hong Kong,” Souede tells AsianInvestor.

Permal and Fauchier asset management staff from London and New York will be relocated to the Shanghai office, which will tentatively be led by Steve Zhang, head of emerging markets investments for Permal.

Zhang, who oversees the China Strategy Fund, is based at Permal’s Singapore operations, which is the centre of its regional asset management activities. Over the long term, Permal envisages the base switching to Shanghai.

Interest in Permal’s mainland products largely come from investors in the Middle East, which are chiefly institutional.

“To date, the most receptive clients we’ve had for what we do in China have been from the Middle East, by far. China, and Asia, are under-owned by the vast majority of US institutions now,” says Souede.

“That will change, but it will change over time,” he adds. “Hopefully we can market what we’ve accomplished in China on a global basis."

Permal’s investments in Chinese managers are done solely through managed account structures. It is a unique approach to the mainland market by Permal; of its investments in 180 managers globally, only 80 are done through separately-managed accounts.

“It’s [managing] risk in terms of the individual manager,” says Souede. “I want to choose the vehicle, and the auditor. The account is mine so I can liquidate the portfolio [at any time].”

It also enables Permal to tailor its exposure to individual managers. As an example, Souede cites an allocation to a China team that is particularly strong in selecting healthcare-related stocks. As such, its mandate for the manager is solely focused on the sector.

Permal’s China Strategy Fund, which runs $182 million in AUM, is invested in equities-based strategies, although the firm plans to diversify its China product offerings as the mainland’s capital markets develop.

One particular area of interest is fixed income, which – along with event-driven and macro hedge funds – forms part of Permal’s core offering.

Bond issuance in China, including municipal bonds, will eventually be a conventional offering in mainland capital markets, Souede predicts, as will a greater range of hedging instruments.   

“I do believe that China will allow shorting of individual stocks over the next 12-18 weeks. That would be a big boost to firms like Citic Securities,” he says.

“Ultimately for Permal, in China, what I really want to have is a multi-strategy fund,” notes Souede. 

Permal’s China offering is one aspect it is developing in order to provide differentiation within a FoHF industry which is experiencing consolidation amid shrinking AUM.

Its merger with Fauchier will create an entity with $24 billion in assets under management and raise the number of hedge fund managers in its portfolio from 180 to about 220.

Yet in the minds of investors, performance is the crucial differentiator, says Souede. “Any asset management firm has to begin by distinguishing itself by performing.

"The key thing is superior, risk-adjusted returns," he says. "That’s really the mantra of any fund, whether it’s a fund of fund or single manager.”

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