Lilian Co, who left Baring Asset Management after running Hong Kong and China equities there for 10 years, is preparing to launch her new hedge fund company, LBN Advisers and its LBN China+ Opportunity Fund.

When Co took responsibility for BaringsÆ long-only Hong Kong/China portfolio in 2001, it had $100 million in assets under management. When she left Barings in July (her official leave date was September), the portfolio had reached $5.7 billion.

She also co-managed BaringsÆ China long/short fund, which launched in 2004. She took sole responsibility for that strategy in June 2006, and points to the fact that from then on the fund never had a negative month, even during market downturns in June 2006 and March 2007. ôI can manage the portfolio through periods of volatility,ö she says.

After proving that she can run a long/short strategy, it seemed logical to go into business for herself as CIO of a hedge fund.

Two partners join her. Benjamin Chang is CEO, responsible for compliance, risk management and operations. He had previously served as executive director at Goldman Sachs, responsible for IT and operations. His experience included working with GoldmanÆs China JV with Guo Hua Securities.

Second is Simon Lam as investment director, who will do research, generate ideas and assist Co with portfolio construction. He has 15 years of experience as a sell-side analyst, including stints at Credit Suisse and CLSA; since 2004 he had worked at a hedge fund in Hong Kong, South Ocean.

Co explains that Simon Lam used to give her investment ideas, particularly in the small-cap area. ôI used to be his client,ö she says. ôWe have the same investment style.ö

Which is bottom-up stock picking. Co believes the Hong Kong/China story offers even more inefficiencies today than in the past. One reason is that the surge of IPOs from the mainland means ôinvestors get distracted,ö she says. Another is that the lure of hedge funds has left the sell side bereft of its most talented analysts, so a fund managerÆs own research can unearth plenty of ideas.

In fact one way Co plays the market is to take advantage of low-quality analysis. One example from her Barings days concerns the stock of Hong Kong Exchanges and Clearing itself, which most sell-side analysts rated sell or hold out of sentiment that Shanghai was going to eat Hong KongÆs lunch. ôThey missed the potential of mainland issuance coming to Hong Kong,ö she says. ôWe made a lot of money on that trade.ö

Nor is she prone to making long-term market calls. ôI donÆt need a view of the future because I can use the numbers available today.ö For example, analysts recently have been too conservative and failed to see corporate earnings would improve. Chalco, the Chinese aluminium company, is a good example: analysts hated the stock, Co says, and didnÆt realise that demand would lift earnings. ôI doubled my money on a blue chip,ö she says.

For now she will trade in the Hong Kong market, as LBN does not have a QFII quota to trade A shares. The firm will probably apply for a quota, but not right away, as valuations in A shares look ôcrazyö, she says. In the meantime, the mainland bid will support prices in H shares and the Hong Kong market. Although she is bullish, she does see shorting opportunities among H shares such as Ping An Life and China Life that are heavily exposed to the excesses in the mainland stock market.

ôOur strategy is common but we have a good team,ö Co says.

LBN will employ modest leverage of 2x. It will charge the standard 2/20 fees. Its prime broker is Morgan Stanley and its administrator is Fortis. The fund will launch in October, and Co hopes to build up to $50 million or more.