Investing in alternative strategies with Prudence
Chen Li-hou, founder of Taipei-based Prudence Advisory, discusses plans to offer Taiwanese retail and institutional investors access to a fund-of-hedge funds.
What type of hedge fund does Prudence Advisory offer investors?
At the moment, we have a combined structure fund. 65% of the fund is invested in the Oak Hill Contingent Capital Fund. This is a US-based fixed income arbitrage fund that focuses on G7 instruments. The Oak Hill team is led by some of the members of the old LTCM team. They have the best skill in the fixed income arbitrage world, and I have a personal relationship with them. The remaining 35% of our fund is managed by us and consists of US long-only floating-rate notes, most of which are AAA rated. This is intended to reduce the risk of the portfolio.
What type of investors are interested in this fund?
Our investors are made up largely of Taiwanese institutions, including banks, insurance companies and foundations. These investors are looking for a very low risk investment with a medium return profile. Our fund provides them access to a lower risk version of Oak Hill's fund. Hedge funds are new products for these investors, and they feel comfortable with us as we have access to all of Oak Hill's trading information and can provide our investors with a greater degree of transparency and comfort.
How large is the fund, and what level of returns has it realised?
Our fund size is currently $50 million. Since we launched in November 2002, we've realized an annualized return of 3%. This much lower than our target returns of 10% and is due to the stressed condition of the US fixed-income market last year.
Are you planning to launch any other fund-of-hedge funds products?
Yes. We are looking to create a broad based arbitrage fund-of-funds, which would include a range of fixed income and convertible bond arbitrage strategies. This year, Asian convertible bond strategies are one of our favourites so we would certainly include this. We are hoping to offer this product to institutional investors in Taiwan by the middle of the year.
We are also considering structuring this product as a Principal Protected Note and offering it to retail investors in Taiwan. We are currently in discussions with some potential guarantors. Hopefully this can be launched by the end of the year.
Do you have plans to run your own single strategy hedge fund?
At the moment I am managing some money in an equity fund using shorting and derivatives techniques. The fund invests in Taiwanese stocks, options and futures. Its about $10 million in size and consists entirely of our own private proprietary capital. We hope that after it has operated for a while and developed a track record we could include it in one of our fund-of-hedge funds and offer it to investors. But, there are still issues with stock liquidity in the Taiwanese market at the moment and there are not many instruments we can use for our strategy. Once we see a more liquid market develop here and the shorting facilities improve, we will probably go through the regulatory process to set up a fund.
What were you doing before you set up Prudence Advisory?
After I got my PhD in finance from Columbia University, I worked for in Nomura's New York-based alternative investment team for three years. I then came back here and set up Prudence Advisory. We have eight people in our team, most of whom are very experienced in the securities industry.