Hans Schlaikier, Hedgeweek

Ex-SAC trader prepares to launch hedge fund… New tax exemption attracts funds to Hong Kong…

Miaodan Wu, a former portfolio manager at billionaire Steven A. Cohen's hedge fund SAC Capital Advisors, is preparing to launch his own hedge fund in Hong Kong to bet on price swings in financial securities, as reported by Reuters.

Wu was among at least seven SAC Capital staff who left Hong Kong this year, at a time when Cohen and his firm are drawing increased scrutiny in the U.S. government's long-running investigation into insider trading.

Known in the industry as "Dr Wu," his hedge fund, named Bach Option, will launch by the end of 2013, said three sources who could not confirm the start-up capital as the plan was at an early stage. The amount of money he plans to raise is not yet clear.

The hedge fund will bet on volatility, which refers to the rate of change in the price of a financial asset.


That strategy is currently out of favour as volatility has collapsed due to quantitative easing by central banks, though it helped Artradis Fund Management grow into a USD4.5 billion hedge fund in Asia during the financial crisis, making it the most successful volatility hedge fund in Asia ever.


Still, last week's stock market swing in
 Japan, which raised the volatility index tracking the Nikkei 225 by nearly 60 per cent on May 23 alone, may draw investors to such funds.

The main Artradis funds made USD2.7 billion for investors between 2002 and 2009, mostly during the financial crisis when volatility rose, but shut down in 2011 after double-digit losses in the prior two years.


While it's possible for volatility funds to make money in all market conditions, super-sized returns are possible only in times of stress.


Wu, who worked for SAC between 2006 and 2013, has hired Henry Ondo, who was previously an equity derivatives sales executive at Citigroup Inc.

 
More hedge funds and private equity firms will set up in Hong Kong because of a government reform plan and the internationalisation of the yuan, industry representatives say.

Philip Tye, chairman of the Hong Kong branch of the Alternative Investment Management Association, a hedge-fund lobby group, said he expected more funds to domicile their products here because Financial Secretary John Tsang Chun-Wah in February proposed to expand tax exemptions for private equity funds and to allow fund products to be structured more flexibly. Tsang made the proposal in his budget speech.


"The government reform plans, as well as the internationalisation of the Yuan, are going to make Hong Kong more attractive to many hedge funds," Tye said.


"Hong Kong has always been an ideal distribution centre for fund managers to sell their fund products to Asian investors.


"The proposed reform plans would now make Hong Kong more attractive for fund companies to domicile their funds here. This will create job opportunities and benefit the hedge fund industry as a whole."


Of the roughly 1,700 funds in the city, about 300 are domiciled here. Most are domiciled in Luxemburg and Dublin, partly due to structural and tax issues.


A law change in 2006 granted a tax exemption to offshore funds investing in stocks and futures. The new proposal would expand the tax exemption to offshore private equity funds that invest directly in companies. Tsang's other proposal was to allow funds domiciled in Hong Kong to be established as a company. They are currently required to be trusts.



John Levack, vice-chairman of the Hong Kong Venture Capital and Private Equity Association, said the reform plan would attract more private equity funds to Hong Kong.

"Hong Kong is an excellent centre for private equity operations but without structural reforms, growth will be limited.


"The opportunity, however, is to act as the offshore centre for China funds and to be the Asian regional hub for those multinational private equity firms who are not yet present in Asia," Levack said.


That would double the number of private equity firms based in Hong Kong and create jobs for private equity fund managers and related professionals, Levack added.


In his budget speech, Tsang said the Hong Kong government was talking with mainland authorities about setting up a mutual recognition agreement so as to allow the cross-border selling of fund products. It would mean Hong Kong-based fund products could be sold in the mainland and vice versa.

With Asian economies largely good in good health and bond markets flush with liquidity, what’s a hedge fund specializing in distressed debt to do?


That’s the question posed by Asian distressed investing veteran Michel Löwy, chief executive of Hong Kong-based hedge fund SC Lowy, which he co-founded in 2009.

Speaking at the inaugural Karen Leung Memorial Investor Conference in Hong Kong Thursday, Mr. Löwy, who formerly led Deutsche Bank AG’s Asia-Pacific Distressed Products Group, said he is starting to see signs of stress in Asian debt markets.

“If we scratch under the surface…a number of cracks are appearing,” he said at the charity event inspired by the Ira Sohn conference.

While bond issuance in Asia this year is at a record high with companies across the quality spectrum tapping investors’ appetite for yield, Mr. Löwy said there are dangers lurking–many of those bonds will be up for refinancing in a few years from now.

Asian issuers are vulnerable to a capital flight, he said, because about 40 per cent to 50 per cent of bonds issued in the region are underwritten by US and European investors.

“The money can go back to domestic markets very quickly,” he said.



Private banks, which are big buyers of bonds in Asia, particularly riskier ones, are another vulnerability, said Mr. Löwy, without elaborating. But debt bankers say high-net worth individuals are typically more fickle and speculative investors than traditional long-only funds.
 
Ex-Mizuho star credit strategy manager Jeffrey Yap is to launch an Asian multi-strat fund, focussing on Asian credit strategies, long/short credit, bonds and private debt. The fund is an Asian-focus fund but will have the ability to invest globally where it sees fit.

Yap is launching with a commitment of USD100m in seed capital from an unnamed seeding source. USD50m arrives on day one, and the remainder within the year. The fund will be prime broked by Goldman Sachs and Merrill Lynch. Yap is currently on gardening leave from Mizuho but is putting together a team of five to support him in his new business.


In a recent interview, Yap said: "There seems to be more interest in Asian credit in general at the moment. It is somewhat in the infancy stage but it has grown over the last couple of years. Asian credit used to be seen only in a hard currency perspective in US dollars for instance, but post-Lehman the local currency market has grown in size and the borders between offshore and onshore have come down a bit."


Yap is targeting returns of 15 per cent over LIBOR for the fund but admits that personally he will be happy with anything above 10per cent over the long term. "It’s an aggressive target" he says, "but Asian credit presents a good opportunity for investors to take advantage of the onshore and offshore market."

 
Gottex Fund Management Holdings, which allocates USD6.4 billion to hedge funds, has cut its largest Asia fund’s bets on small Japanese companies whose share prices may fall more sharply in the market correction.

The USD250 million Penjing Asia Fund now allocates two-thirds of its Japan investments with managers that focus on large companies, which have appreciated less in the recent rally and are likely to benefit from rising corporate activities, Max Gottschalk, Gottex’s Asia chief executive officer, said in an interview yesterday. That compared with an equal split at the end of December.


The benchmark Nikkei 225 Stock Average has tumbled 16 per cent since May 22, the peak of a 76 per cent rally from Sept. 28 in anticipation that the economic stimulus and monetary easing of Prime Minister Shinzo Abe and the Bank of Japan would end 15 years of deflation. Both the Nikkei and the Jasdaq Stock Index of smaller companies, which surged 88 per cent in the eight months, have dropped as bond yields jumped.

 
“A big part of the rally in the equity market in Japan has been in small- to mid-caps,” Hong Kong-based Gottschalk said. “Some of them may have become too expensive. If there’s any market volatility, liquidity will dry up so the small-cap market will potentially have more risk on the downside.”

Penjing Asia Fund, which had investments in seven Japan managers by May, returned almost 10 per cent in the first four months, according to Gottschalk. Japan-related managers contributed about three-fifths of the profits, he added.


The fund allocated about 28 per cent of its investments in April to Japan-focused funds, including those betting on rising and falling stocks and corporate events. The figure also included funds that picked Japanese securities without taking market risks and Asia-wide funds with more than half of the money invested in Japan, he said.


The percentage doubled since December 2011 and averaged about 26 per cent in the first four months, said Gottschalk.


Gottex doesn’t plan to reduce its Japan investments “significantly,” he said. Instead, the latest allocation change was part of Gottex’s efforts to rotate between currencies, bonds and stocks to take advantage of trading opportunities in Japan, he added.

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