Last year saw a return of 4.90% and year to date to the end of May 2013, the fund is up 9.8% vs. a decline of 4.3% for the MSCI China Total Return USD Index, giving an outperformance of 14.1% (net of fees), which demonstrates the benefits of a hedge fund approach particularly when the returns are provided for around a third of the market volatility.
The fund invests in 15-18 specialist managers, all Asian based but primarily located in China and Hong Kong to provide access to both the onshore and offshore markets. All underlying managers have at least 10 years' experience in the financial industry and all have managed their strategies for at least five years.
Currently there is some scepticism in the viability of the Chinese economy going forward, with some observers predicting a potential crash. Curry says: "There are definitely structural issues in China and the question is how long do they have to address them and what is the will to do so. The new leadership appears to be putting great emphasis on the importance of structural reform. This leadership team has a 10 year term and if they don't implement a programme of reforms there is concern that they will still be in power when the embedded structural issues really start to affect the long term stability of China's economy."
Curry believes that there is sufficient time to limit the damage but that reform is imperative. "What it means for guys like me is that instead of broad stimulus packages, government is likely to be very specific as to which sectors they stimulate and which they rein in. You will have definite winners and losers and from a stock picking perspective that's great. Importantly, industries that have previously been supported and which form the majority weight within indices are likely to lag, adding to the interest and demand for unconstrained specialist active long and hedged managers."
Growth estimates for the Chinese economy this year have dropped from 8.2% to 7.5%, and Curry warns it could feel lower than that. In terms of dealing with the often reported corruption, Curry reports a sea change in attitude. "The guys on the ground report that at the local government level there is real pressure to curtail expenditure and accept fewer gifts and perks. The message from central government is that they have to clean up their act."
The alternative industry in China is fledgling, and strongly focussed on stock picking absolute return long only funds. "That group has grown significantly" Curry says. Shorting is now allowed internally in China but it is still expensive and limited. The domestic A-Share market has some 2200 stocks which cover a broader range than is available in Hong Kong. "Stock pickers have a very broad and diverse opportunity set on the mainland" Curry says. The fund tends to have a net long exposure of between 30 and 60%. It is invested in both hedge and long only funds and uses as one of its evaluation tools, a good knowledge of underlying stocks to evaluate the potential stock picking alpha generation of a fund. "We want to able to understand the specific stocks in the funds' portfolios and why they have been chosen. Stock picking is an important part of our alpha generation. We see it as important to understand the genesis of stock ideas and therefore to be able to make a call on the sustainability of stock picking alpha generation" Curry says.
The fund of fund business has had its fair share of criticism over recent years. One way that fund of funds can be relevant to investors is by providing an outsourced offering in specialist areas like China. Curry believes it is the type of specialist product that will prove increasingly attractive and which can be easily customised to investor goals. "China is still a smaller specialist area for global allocators that requires a high degree of know how as it is complex and not always transparent. For allocators who would like to invest $25m to $100m in China building the capability in house is probably too expensive. We look to provide investment solutions and market intelligence and in doing so hope to give investors a better sense of what is going on in China and where the opportunities are."
Curry is excited by market conditions at the moment. "In the last six months, funds have out-performed the market significantly" he says. The fund's underlying managers have been seeing significant opportunities through long and short stock picking as a result of the new policy initiatives being implemented by China's new leaders. The firm has also found that most of the portfolio managers of the underlying funds they are invested with have increased their personal investments in their funds in April and May, demonstrating a very high conviction in stock picking opportunities.
He observes a certain degree of consolidation with certain managers growing quickly and others battling to raise money. "We are seeing some interesting guys coming out of the first generation Greater China funds. We like to look closely at newer smaller guys" he says. Funds with assets of over $500-600m start to struggle with the short side of their book and start to lose some trading flexibility. Curry likes the transparency of emerging managers and will start to look at funds with assets of $50m and above. One potentially interesting source of new hedge fund talent is investment managers coming out of the big mainland asset management companies in China and starting funds, sometimes with an offshore version, registered in Hong Kong. Curry comments that there is never a dull moment investing in China and for those with a stomach for volatility and a long term view, China will prove to be a good long run call.
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.