One of the pioneers in China's fixed income market, John Li Huaizhong, has launched a multi-strategy hedge fund targeting the full range of China-related securities. The company, Qinhan Capital Management, is domiciled in Delaware and headquartered in Jersey City, New Jersey, but has recently opened its Shanghai branch office and boasts an on the ground presence in China. The firm's first two funds are based in the Caymans and in Delaware, and follow the same strategy.

The Qinhan China funds seek absolute returns via long/short strategies in convertible bonds, equities, fixed income, closed-end funds and overseas-listed securities of Chinese companies.

The firm is now in the final stages of selecting a prime broker before it formally launches the funds, says Li. He says trading is slated to commence on March 30. The key selling points are the principals' track records, the funds' presence on the ground in China and the "substantial" amount of partners' money used as seed capital. Fourth, Li says, "Since 2001, the partners have built localized trading and risk management processes, proprietary securities valuation models and unique due diligence practices."

Li, the firm's CIO and a former scientist at the Salk Institute in California, has 10 years of experience managing money for firms such as Deutsche Morgan Grenfell, China Southern Fund Management and Simon Murray & Co. (China). He was behind the launch of China's first bond funds and principle-protected mutual funds at China Southern Fund Management.

Head of research and compliance Zhang Shijie, a former engineer, has 18 years of investment experience in China and Singapore at firms such as Huarong Financial Guarantor, Everbright Securities and Shenzhen Guocai Investment as well as China Aviation Group's investment management team.

The executive marketer is Horacio Marquez, a 30-year veteran of Latin American and global market M&A, including stints as head of emerging market fixed-income research at Merrill Lynch Investment Managers, and as research director and economist for Latin America at Swiss Bank Corp.

Qinhan's risk management consultant is Ken Dooley, who worked for the past three years building risk management systems at Penghua Fund Management in Shenzhen.

Using Li's track record, the Qinhan China Fund's track record since September, 2001 boasts an annualized return of 12.45% with a 0.108 standard deviation, consistently beating the S&P500 and the Shanghai Stock Exchange index.

The portfolio is built using convertibles quasi-arbitrage, leverage fixed-income arb, long volatilities or the 'vega' trade (trading options as their prices change according to volatility), and playing convergences on premiums or discounts on closed-ended mutual funds, as well as long/short trades on Chinese equities and overseas securities.

The firm uses its own statistics methodology designed to fit the Chinese market as well as a proprietary market index, and sticks to a few simple rules to manage risks, such as investing only in long-only securities that trade below a theoretical price, or using leverage only when the downside risk is predefined.

The partners are charging a 1.5% management fee and a 20% performance fee beyond a high watermark (undisclosed), with a one-year lockup.