Two former ICBC Credit Suisse Asset Management (International) portfolio managers have started their own hedge fund to invest in China in a clear sign that Beijing's new reform agenda is drawing investors.
Genesis Capital Investment, founded by Kang Hao, the former head of investment for ICBC Credit Suisse Hong Kong and portfolio manager Jimmy Weng, will start trading by end of this month and aims to raise about USD100 million next year.
The launch comes after last month's government plenum, in which China unveiled its boldest economic and social reforms in nearly three decades to put the world's second-biggest economy on a more stable footing.
The hedge fund will trade Chinese shares listed in Hong Kong and the United States.
Hedge funds investing in Greater China returned 17 per cent through November this year, according to data from Eurekahedge, outpacing a 4 per cent gain in the MSCI China index Asia hedge funds returned 14.4 per cent during the period.
The outperformance by China hedge funds has drawn investors, with their collective assets rising to USD12.9 billion in October, the highest level on record and 16 per cent higher than the pre-crisis peak, according to Eurekahedge.
The ability to hedge out the credit risk of a convertible bond via an asset swap combined with market volatility in Japan over the past 12 months has led to a significant uptick in hedge fund investment into convertible bonds, say market participants, as reported by Asia Risk.
Issuance of convertible bonds in Japan stands at USD4.5 billion for the year to October, compared with USD3.5 billion for the whole of 2012, of which USD1.9 billion was in a single convertible issued by Sony, according to data provider Dealogic. The number of convertible bonds issued has also increased from 14 in 2012 to 26 so far this year.
Convertible bonds are fixed-income products with an embedded option to convert to equity at a fixed price. Traditionally investors in Asian convertibles have been a 50-50 split of outright long-only fund managers and hedge funds. However, in recent issuances in Japan, dealers say hedge fund demand has increased to around two-thirds of the order book, with long-only investors making up the remaining third.
"The Japanese market has really taken off after starting from a low base. The expectation of rising interest rates means Asian issuers are taking the opportunity to lock in cheaper funding costs. Convertibles are also generally unrated, making them easier to issue than a traditional USD bond where a rating is usually required," says Stanley Chan, head of equity-linked origination, Asia-Pacific at BNP Paribas in Hong Kong to Asia Risk.
Booming Asian internet stocks have fueled Passport Capital's double-digit gains this year at a time when many hedge funds have delivered only modest returns.
The San Francisco-based based hedge fund, which invests USD3.1 billion for clients, has returned 18.3 per cent in 2013, after gaining 2.4 per cent last month, an investor with the fund said on Wednesday.
The average hedge fund has gained only about 6 per cent this year, according to industry data, falling far behind the 25 per cent rise posted by the Standard & Poor's 500 index.
Hedge funds' generally lackluster returns coupled with their high fees have raised questions among their wealthy investors about how effective these investment pools have been.
But Passport, best remembered for its 219 per cent gain in 2007 just before the financial crisis, has set its sights abroad, stocking its flagship Global Strategy fund with picks from China and Saudi Arabia.
Similarly, short positions in gold, copper and other mining stocks have helped the fund this year, the investor said.
A spokeswoman for the fund declined to comment.