CEO Morning Brief

Asia Hedge Funds Betting on Japan, AI to Avoid China Turmoil

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Publish date: Fri, 08 Dec 2023, 09:01 AM
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TheEdge CEO Morning Brief

(Dec 7): Asia hedge funds are set to post improved performances in 2023 after dodging the China investment minefield with winning bets tied to Japan’s rebound, economic trends and the artificial intelligence-fuelled (AI) technology rally.

About 58% of Asia-focused funds tracked by Preqin Ltd avoided losses in the first 10 months of the year, compared with just 32% in 2022. Among the 2023 winners are funds overseen by Astignes Capital Asia Pte, Keystone Investors Pte, Panview Capital Ltd and Trivest Advisors Ltd.

Buoyant stock markets in November — the MSCI Asia-Pacific Index jumped the most since January — may have narrowed or eliminated losses at other funds, with a Eurekahedge Pte index edging up about 1% for the month even before most funds reported numbers.

Funds were rewarded for navigating choppy waters in China, where the short-lived euphoria over exiting from Covid-19 restrictions gave way to persistent concerns about a housing market crisis, economic slowdown and geopolitical tensions. Those who cut China bets early in favour of Japan and global technology names reaped benefits, even as the investor stampede for Japan stymied bearish wagers.

About 68% of China-focused hedge funds lost money in the first 10 months of the year, compared with just 18% of peers specialising in Japan, according to Preqin data.

Below is a run-down of some of the outperformers and laggards. Representatives of the funds declined to comment for the story.

Former Goldman Sachs Group Inc partner Ryan Thall’s Panview Asian Equity Fund surged nearly 20% in the first 11 months, led by bullish bets on smaller, lesser-known Japanese companies swept up in corporate governance reforms, said a person with knowledge of the matter. Also paying off were bets against Asian duty-free shop operators for not meeting market expectations after China lifted pandemic controls. It also profited from a short position against a US cosmetics maker that has struggled to maintain sales in China.

Athos Asia Event Driven Fund returned 5.6% through November, said a person with knowledge of its performance. Deals lifted returns, such as those involving Australia’s Origin Energy Ltd and Japanese companies. The fund made money from a bet that the market exaggerated the risk that China would refuse regulatory approval for US chipmaker Broadcom Inc’s merger with cloud company VMWare Inc.

Athos, an Asia event-driven shop founded by Matthew Moskey and Fred Schulte-Hillen, also profited from short-term pricing gaps among Chinese companies’ shares traded domestically, in Hong Kong and in the US. More US-traded Chinese companies have gained listings in Hong Kong in recent years. The investor exodus from Chinese equities made for greater arbitrage opportunities as stock prices became more volatile and spreads between different classes of shares widened, said the person.

Trivest Advisors’ TAL China Focus Master Fund averted the fate of its peers with a nearly 16% gain in the first 10 months, said people with knowledge of the matter. At the end of September, the firm held more than US$830 million (RM3.88 billion) worth of shares of US technology giants Microsoft Corp, Meta Platforms Inc, Nvidia Corp and Alphabet Inc. It also had nearly US$193 million parked in the US shares of PDD Holdings Inc, a rising star among Chinese e-commerce companies, and Luckin Coffee Inc, the Chinese coffee chain that has staged a turnaround after fraud allegations. The two have soared 74% and 37% respectively this year.

Keystone Investors returned nearly 24% in the first 11 months, said a person with knowledge of the matter. It dabbled in some of the same names, including Microsoft, Nvidia, Meta and PDD, along with New Oriental Education & Technology Group Inc, whose US shares more than doubled this year. Keystone is led by Liu Xuan, a one-time analyst and portfolio manager at global firms including Point72 Asset Management and Millennium Management.

Ovata Equity Strategies Fund rose 9.7% in the first 11 months, said a person familiar with the firm helmed by James Chen, former Asia equities head of BlueCrest Capital Management. More volatile markets favor funds like Ovata that seek to profit from wider pricing disparities between related securities. The fund also made money from Japanese stocks, with the Nikkei 225 up 27% this year.

Two Asia-focused firms that allocate capital to pods of investors with different strategies proved the benefits of diversification this year. Dymon Asia Multi-Strategy Investment Fund gained an estimated 10% in the first 11 months, while Polymer Asia Fund was up 3.4% through October, according to people with knowledge of the matter.

Macro wins

The biggest winner as a group was macro hedge funds, which trade across stock, bond, commodity and currency markets to tap broad trends.

Arete Macro Fund of Will Li’s Ocean Arete Ltd gained 9.1% in the first 11 months, according to a person with knowledge of the matter. Lifting returns was a bullish bet on the greenback and bearish wagers on longer-dated US Treasury bonds, on the belief that the US economy would withstand higher interest rates. It also made money buying stocks of large Chinese banks as a proxy for fiscal stimulus, said a person with knowledge of the matter. Further paying off were short positions in European luxury goods, as higher global inflation hurt consumers’ purchasing power.

Trades involving Japanese rates and China’s economic slowdown helped Southern Ridges Capital Pte’s newer Summit Macro Fund to an 8.8% gain in the first 10 months, while its older macro fund rose 4.6%, said a person with knowledge of the matter. Star trader Minal Bathwal steered his Brevan Howard MB Macro Master Fund to a nearly 11% gain in the same period, said people familiar with its performance.

Loss makers

The year has been toxic for others, particularly those with bullish China bets, with the MSCI China Index dropping 14%. Among the Asia loss-makers, 40% were more than 10% in the red by October, according to Preqin. Former Marshall Wace portfolio manager Ramesh Karthigesu’s Kaizen Asia Pacific Master Fund lost about 19% in the period, a sharp contrast to the 26% gain last year, said people with knowledge of the matter.

China-focused Yunqi Path Offshore Fund lost about 15% through October, according to its newsletter. It highlighted how long-term fundamental stock pickers can struggle when bears dominate the market. Lufax Holding Ltd, its third-largest long position, tanked 57% in US trading this year, while Qifu Technology Inc., its largest bullish bet, dropped 28%.

The fund began building a position in Lufax in the final quarter of 2022 to become one of its top shareholders, according to data compiled by Bloomberg. Its October newsletter laid out the investment thesis: the provider of loans to small businesses in China has returned to profitability, and even with a second dip in the broader economy, it would take a 70% hit to its loan book to justify its current low valuations.

Yunqi’s founder Chris Wang, a former co-manager of Owl Creek Asset Management’s Asia funds, has proven himself right in the past. Two other top-five long positions — social media platform Joyy Inc and ride-hailing provider Didi Global Inc — rebounded at least 18% this year, after losing about a third of their value last year. The fund lost 1.7% in 2022, when the average China stock hedge fund plummeted 14%, according to a Eurekahedge gauge.

Zaaba Pan Asia Fund narrowed its loss to 12% this year through Nov 29. It had more than a third of net assets parked in bullish wagers on Greater China stocks by the end of October, according to its newsletter for the month seen by Bloomberg News.

Source: TheEdge - 8 Dec 2023

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