Hong Kong-based Cheetah Investment Management is an Asian fund management firm whose growth parallels that of the development of an Asian fund management sector and beyond that, an Asian hedge fund sector. Assets under management with firms that Cheetah has seeded total some $850m.
In a wide ranging interview with Asia Pacific Intelligence, Cheetah's managing director, Raymond Wong, explained that his hedge fund roots lie in investing money in a personal capacity for his family for the last 20 years. "Back then, in Asia, there weren't any hedge funds so I had to fly to New York or Chicago to meet fund managers" he says. "We found some great managers as the hedge fund world back then was very different from what it is today. We experienced good returns and found it a great way to invest."
By 1999, Wong set up Cheetah Advisors, a predecessor of Cheetah Investment Management, with the intention of bringing hedge funds to Hong Kong investors. "The lower volatility and good mid-teen returns from some great fund managers who were at the same time aligned with you as they invested their own money, and only made a performance fee when they produced good returns for you - all of that made a lot of sense. And at the time, not a lot of people were doing that in Asia."
Believing it was a good business opportunity to bring investing in this style to Asia, Wong formed Cheetah Advisers, and then formed Cheetah Investment Managers and a formal fund of fund business in 2001. With the launch of this business, the firm began to attract some initial local interest and, in particular, the attentions of V-Nee Yeh, one of the co-founders of Value Partners, one of the largest independently owned fund management firms in Hong Kong.
"Yeh looked at what we were doing, for which I am thankful" Wong says. Yeh observed that a lot of Hong Kong investors were not used to using an external professional money manager to manage their investment portfolios in the first instance, and found it even less appealing to pay a fee to a manager to give to other managers through the fund of fund route. "This is a concept that many found even more foreign and less readily acceptable" Wong says.
Yeh believed that family offices in Hong Kong wanted more control and direct participation in their investments, and so he suggested building a business focussing on good investment talents in Asia; home grown, born and bred Asian fund managers who knew the local market better. The resulting business provided seed capital for them to launch their own funds. "We are bringing the hedge fund idea but doing it in Asian markets, investing with local talent, rather than going to New York" Wong explains.
This business started in 2003 which were early days for the fledgling Asian hedge fund industry but Wong had already had the experience of managing the fund of fund and had been investing in hedge funds for some time so knew the Asian hedge fund landscape well and saw a good flow of people looking for capital and wanting to launch funds.
Cheetah's model is closely aligned with that of Value Partners. Funds are mostly fundamental and value biased, with a bias to the long, rather than the short. "In Asia, a lot of investors are chasing growth which is subject to volatility but we can see the merits of a value bias" Wong explains. And the preference for a long bias comes from a belief that shorting does not protect Asian portfolios from volatility. "We have to live with the volatility and have a good risk adjusted return" he says.
The firm launched funds that invested in hedge funds from Japan to Korea but still struggled somewhat with attracting local investors. "Asia has very little long term institutional money in the way the US has, for instance" he says. "In the US there is a huge pension industry and huge endowment industry with long term money looking for real returns and with a pretty free investment mandate. This does not exist in Asia."
The Hong Kong Monetary Authority, the central bank and effectively sovereign wealth fund for Hong Kong, does not invest with many independent managers; the Hong Kong hospital pension fund has around $3bn in it which wouldn't rank in the top 500 of US pension funds by assets under management and the Mandatory Provident Fund in Hong Kong has less money in it than many American corporate schemes.
"The culture and critical mass of large institutions is not there" Wong says. And in terms of private, high net worth investors in Hong Kong, asset raising from that group bears its own set of problems.
"Hong Kong has some of the richest people in Asia and in nine out of 10 cases, the richest families here have made their money from real estate" Wong explains, saying that in the 20 years to 1997, Hong Kong real estate compounded at 18% a year for 20 years and that with leverage, people were achieving returns of more like 30%. "It's hard to convince them that someone else can make money like they can" Wong says.
Banks in Asia present another phenomenon, with most local banks being very conservative, largely deposit-taking institutions. Private banking in Hong Kong is mostly offered by global multi nationals who have a strong presence but really offer global products from New York or London. "So even if family offices invest through a private bank, the relationship is not with locally based managers. It's a tough environment for Asia based managers to raise local capital."
Wong also observes that until quite recently the Asian hedge fund industry is still quite a bit behind the western world. "A lot of funds who are headquartered in Asia and operate out of Asia are really still relying on investors from the US and Europe."
Wong sees Hong Kong as a good hub from which to run pan-Asian strategies, with its access to China. "The Hong Kong hedge fund industry has benefited from the association with China" he says, "because the global capital chasing China comes through Hong Kong."
He observes that Japan was the most important hedge fund market in Asia, back when the industry was growing in the region, before 2000. The respective roles between Japan and Hong Kong have reversed dramatically as Japanese hedge funds fell foul of market upheavals in 2006 and 2007 when a pretty painful bear market in Japanese small caps put to death a number of funds who were long small caps and short large caps.
2006 saw Cheetah launch one of its most successful hedge funds, long/short Pedder St Asia Absolute Return Fund, managed by Lester Poon, a portfolio manager described by Wong as one of the few homegrown local people who has managed money in Asia since 1990.
Poon started with Citibank. "Those outfits were typically staffed with expatriates from London, Boston or New York who were posted to Hong Kong. Every downturn like 1994, 1997, 1998 or 2000 saw the expatriates go back to where they came from so continuous experience in Asia is rare" Wong says. "1990 saw the first batch of non expats, really local people doing fundamental research, studying company balance sheets, building models and doing things properly." Poon was among the first to start travelling around Asia looking for investment opportunities, going to Thailand, Taiwan and building up a unique amount of continuous experience.
Poon's fund was seeded by Cheetah and invests long/ short, shorting single stocks and hedging where necessary. "It's similar to our model - long bias with a fundamental and value slant" Wong explains, investing across Asia ex-Japan. The fund has $100m under management and achieved a return of 19% in 2006; 31% in 2007; down 31% in 2008 (against an index loss of 60% in that year). Last year, 2012 saw a return of 24%.
The performance figures reveal that the fund's long term track record for six and a half years is 83%, beating the regional index, the MSCI ex-Japan by 1.5% a year but more importantly, volatility is half that of the index and the beta, the correlation figure, is half also, implying that the fund smooths out and enhances the regional index return.
The fund's investors are drawn from across the range of hedge fund investors, family offices, institutions, high net worth individuals and funds of funds.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.