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Gilbert Tse

The joint venture behind the recent launch of a product backed by Winton in China is Fortune SG, a company owned 49% by Lyxor Asset Management and 51% by Baosteel Group, with 36 billion Renminbi ($5.5 billion) under management.

Gilbert Tse, Executive Vice General Manager of Fortune SG explained in an interview from Shanghai with Asia Pacific Intelligence that the joint venture dates back to 2003. "At that time the Societe Generale Group, through their fund management division SGAM, were looking for opportunities in China and this was one of the first batch of joint venture financial companies in China." Since 2010, the relationship has been managed through Lyxor Asset Management.

Tse explains: "Since 2003 we were basically doing conventional fund management business such as equity long only, fixed income and money market funds, ETFs and index funds primarily on Chinese underlying securities, targeting Chinese investors both retail and institutions."

Fortune SG now offers some 20 mutual funds, mostly based on domestic investments. "The investment appetite in the last two to three years has changed" Tse says. "Before 2009 investor interest was primarily in equity products and there was a rally in 2006-7 but since then because of the less positive environment in the equity market in China, investors have started looking at different alternatives such as fixed income and money market funds."

What has become increasingly popular for Chinese institutional investors, high net worths and sophisticated investors are investment products with an absolute return target, Tse says.

"In August 2011 we brought out an absolute return product developed in-house which went long the portfolio of an enhanced index that we had developed and looking to beat the CSI 300".

Started in 2005, the CSI 300 is a capitalisation-weighted stock market index designed to replicate the performance of 300 stocks traded in the Shanghai and Shenzhen stock exchanges.

The fund, the Alpha Product, was effectively a market neutral fund, and achieved an annualised return of about 7 % before fees, in line with what Fortune had expected, so after one year a second deal was set up with a third due in October. These are segregated accounts products with no more than 200 investors and minimum assets under management of 30m Renminbi ($5m).

The CTA product backed by Winton Capital has the same structure and is already closed to new investors. "It's more like a private placement of a collective investment scheme but it is a good platform for us to promote products which, I would say, are new to investors" says Tse. "I have to say that the CTA is rather a new idea for investors in China."

The new fund is based on the Chinese futures markets of just over 20 futures contracts on the four Chinese futures exchanges, mostly based on commodities but also one financial future but more are expected. The new fund is targeting performance of 15-20% with the same amount of volatility.

Futures on the CSI 300 only started in 2010 so absolute return or innovative products have only been available for the last two years. "Just put yourself into the shoes of local domestic investors" says Tse. "They have fixed income but interest rates are likely to come down; long only equity where there is still some uncertainty and domestic equities are the worst. There are not too many choices for them."

Tse points out that domestic Chinese investors can look at offshore investment products but are held back by the appreciation of the Renminbi against the dollar. "It makes it a difficult choice for domestic investors" he says. "Three to four per cent appreciation will eat into a US dollar investment."

However, in the case of the Winton-backed product, Tse believes that it is an absolute return product with an absolute return target and also a target for volatility. "And it is a product with correlation close to zero to the domestic Chinese equity market so this can give a very good opportunity to these sophisticated investors and portfolio managers for diversification and to optimise their portfolio with products like that - it is a breakthrough which will help diversification" Tse says.

"The product in itself is likely to deliver good returns to the investors but the added value could be more than that."

"In China there is an appetite for volatility, so long as there is a good return - when we talk to investors, that is what some like to see. We shall wait and see how it works for a couple of months with strong confidence and then contemplate other transactions" says Tse. "There is ongoing investor demand because in China, investors are certainly in favour of absolute return."