Barings Asset Management (BAM) makes its foray into single manager hedge funds with the launch of the Baring China Absolute Return Fund this week. The launch builds on BAM's four-year track record for running funds of hedge fund products, including one focused on Asia introduced a year ago.
The equity long/short China fund is managed by Khiem Do and his team based in Hong Kong. Do, head of equities, says the China fund is the first in a series of single manager hedge fund products Barings has in the pipeline.
"We decided to launch the China hedge fund first because our research showed there was a strong demand for this product," he says. "Investors are looking for an alternative way to gain exposure to the dynamic Chinese economy to capture upside with the rising equity markets and preserves capital with falling markets."
He adds that Barings felt well positioned to offer a China hedge fund because of the strength of its China focused team.
"We have a track record going back over 20 years of picking the right stocks in Greater China and avoiding the losers," he comments. Over the last five years the Baring Hong Kong China Fund has delivered an annualised return of 20%.
Do says the hedge fund will have the ability to generate additional alpha by being able to protect capital by shorting stocks and indices during periods of falling markets.
"The China-related markets are not mature markets. When the market falls, almost all stocks go down with it and it is very difficult for a long-only fund manager to make money in these circumstances, no matter how good their stock picking skills," explains Do.
The fund aims at returns of between 15% to 25% per annum.
Given the recent down markets and the poor performance of Asian hedge funds, plus the negative returns posted by most China-focused hedge funds during April and May, Do says investors have become more cautious.
"We're comfortable using the full spectrum of tools available to us to be a real hedge fund. That is we can be net long or net short. During April and May our dummy portfolio was net short to market-neutral."
Do says the fund will short stocks or themes that are over valued on a fundamental value criteria, or short index derivatives if the manager feels the market is likely to fall.
"Liquidity in the futures market has definitely improved over the last 18 months making a China-focused hedge fund more feasible," he comments. "This trend will increase over time as markets open up and borrow becomes more available. Long only funds will wake up to the fact that it is profitable for them to lend stocks."
Do emphasizes the fund has strong risk management measures in place and is focused on protecting capital. "To manage risks we'll be monitoring the positions daily and adopting prudent risk controls and stop-loss triggers," he says.
The fund will begin its investments in the Hong Kong market, but will expand over time to invest in China itself and the greater China region as well as in companies that have a significant China exposure.
"China is a big secular story that's here to stay. The best way to play China may be through other markets," says Do. While he believes the Chinese government will engineer a soft landing economically, he argues that this does not necessarily mean there will be a soft landing for company profits.
"We have a good idea who the winners and losers are going to be and this creates opportunities for us," he concludes.
Do says the fund will launch at market neutral to net short. He expects the launch size to be up to $10 million with the fund raising between $30 million to $50 million in the next few months. To maintain flexibility, the fund will soft close at $200 million.
Do expects to reach this target within a six-12 month window. Barings has invested $5 million into the new fund and Do himself says he will invest a 'significant' amount of his personal capital into the new venture.
Merrill Lynch is the prime broker for the China fund.
Do has been working with Barings since 1996, running long-only equities funds. Although this will be his first experience running a hedge fund, he says he comes from an absolute return background, having started his career at Bankers Trust in Australia, where investment decisions were not measured against indices. He also spent five years at Citigroup Global Asset Management in Australia. Do says he has about 15 years of experience in the global and Australian derivatives markets.
"Through my work in the derivatives market the idea of being net short has become very natural to me," he says.