An experienced long/short manager of Greater China equities is setting up a new hedge fund in Singapore.

Terry Wainwright has been managing a long/short Greater China strategy as the underlying asset for a certificate listed by ABN Amro in Germany on the Stuttgart Stock Exchange. The AIMS Absolute China Certificate was a retail-oriented product and was too inflexible to be used to expand the business, so it was discontinued in December after returning 25% on an annualised basis (in US dollar terms) with 15% standard-deviation tracking error since its inception in July 2003. ABN Amro continues to run the certificate under a new name, with a new investment advisor.

Wainwright is now setting up a fund for global institutional investors, to be called the Aims Absolute China Fund, which he hopes to launch in June.

Singaporean securities firm GK Goh and Kuala Lumpur-based alternative investment shop Aims Asset Management have seeded the start-up. Aims is the sole hedge fund company based in Malaysia and Wainwright has been with its team, headed by David Crichton-Watt, since moving back to KL in 2001 for his third stint in that city.

Aims will be the manager of the new hedge fund while Wainwright and his colleague Thomas Lim will act as investment advisor under a new company he is setting up in Singapore called Altasia Capital. Altasia is being established in the Lion City to facilitate marketing and client service for global investors such as funds of funds. Being in Singapore also gives Wainwright better access to visiting Chinese corporate executives.

The new hedge fund will be run along similar principles to the now-discontinued fund behind the certificate. That strategy had been long-biased but net 50% long on average. It included listed companies in Greater China but had not had access to A shares, because of liquidity concerns for a retail product that required daily liquidity, and had also included globally listed companies with 30% of revenues or profits derived from China. And at least 30% of that fund had been dedicated to commodities as a China play, which was a new idea at the time it was first marketed in 2002.

The new fund will continue this pattern. AimsÆ Crichton-Watt will advise on managing the gold tranche of the fund (Aims is a gold specialist; for an interview with Crichton-Watt, see AsianInvestor magazine, March 2006). Gold is used as both a hedge against equities as well as a strategic investment opportunity.

Wainwright says: ôThere is a lot of pent-up demand for gold in China.ö He explains that its citizens were barred from investing in gold aside from jewellery for four decades. Five years ago the ban was lifted and the Shanghai Gold Exchange was founded.

ôItÆs hard for China to diversify its foreign reserves out of US dollars,ö Wainwright says. ôBut an indirect hedge is through allowing the population to naturally hedge through investments in gold. If the central bank came out and announced its intention to buy gold, it would cause chaos; this is the quieter way.ö He notes that he has seen research estimates that if China bought as much gold per capita as other Asian countries, it would need to acquire two-thirds of the worldÆs annual output.

The new fund will also have the ability to tap A shares. That was a main reason for appointing UBS as its prime broker, as the firm has a large QFII quota. Citco is fund administrator. There is a 1.5% management fee and a 20% performance fee subject to a highwater mark, the previous year-end high.

Wainwright has over the past several years been long domestic demand and short tech and exporters. He says this bias will continue but that prices in consumer stocks are now expensive. Therefore he is looking at indirect exposure to domestic demand, in areas such as expressways, construction and property. He is also short financials, which he believes are expensive and also risky. He argues that many mainland banks, for example, have not proven they have improved their credit skills and should the US economy slow down and hurt many Chinese manufacturers, these companiesÆ bank debts will turn bad.

Wainwright began managing Asian equities and later derivatives as a prop trader in Hong Kong in 1994. He has lived on and off in Malaysia and Germany, where he joined Deka, GermanyÆs biggest equities fund house. He managed Asian equity portfolios for Deka and for HypoVereins Bank in London.