Hong Kong- and Shanghai-based hedge fund manager Galaxy says it will soon launch a new China-themed hedge fund. The firm was originally established in 1998 by Joe Chan to manage money from friends and family, and was opened to the public in 2004.

That first fund was the Galaxy China Opportunities Fund, still managed by Chan and a former principal of Morgan Stanley, Jacky Wong. That fund has soft-closed at $600 million. Performance-wise, it was up 47% on an annualised basis with 20% volatility.

Galaxy has expanded to being one of the best-resourced hedge funds operating in the China niche, with three portfolio managers, nine researchers and eight middle-office staff.

The first fund has a four-legged multi-strategy approach, incorporating position taking, long/short, tactical trading and special situations. The managers realised that the special situations leg looked like a great opportunity for developing as a separate theme, because if that strategy had been carved out of the Galaxy China Opportunities Fund, it would have returned 70% on an annualised basis, with a Sharpe ratio of 2.4.

While the sub-strategy will also be continued in the original fund, the firm decided to establish a new fund that will be dedicated to that single strategy. This will launch shortly with a target size of $300 million and will be named the Galaxy China Deep Value Fund.

The new fund targets returns in excess of 30% on volatility of less than 20%.
That is a lower return than the original fund, but it should be noted that the first fund beat its 15% returns target.

China Deep Value Fund has a maximum gross exposure of 300% and maximum net exposure of 200%. Fees are 2% and 25% and there is a 10% preferred return with a catch-up provision.

The strategy is deep value investment with a Greater China theme. Eighty percent of the portfolio is in China, Taiwan and Hong Kong listed stocks, and the remaining 20% elsewhere, such as China stocks in Singapore and on Nasdaq.

Aiming at exposing to the China growth story in a cheap way, the new fund has a triple sub-strategy, based on stock picking under-researched stocks, event driven and pre-IPO late stage private equity, including convertible bonds.

With stock picks having potential holding periods of 6-12 months and pre-IPOs looking at longer 12-18 month time horizons, this new fund is different in profile to the original fund, where holding periods were comparatively short.

The new fund will be managed by a quorum consisting of the two incumbent portfolio managers, as well as Johnson Cheung who joined the firm four months ago. He was previously head of research at Goldbond Securities and an equity strategist at Goldman Sachs. Alongside them is Tim Tse, previously a director of a Greater China long/short hedge fund at APAC Capital Advisors.

The prime broker and the administrator is Citi. Lawyers are Deacons, Appleby Spurling Hunter and Morgan Lewis and Bockius.