Hedge fund consultant looks to value, not shorting

Short of options: Raymond Wong of Cheetah Investment explains why he is seeding Asian long-only absolute return funds.

Tell us about Cheetah's recent initiatives to seed Asian absolute-return funds?

Wong: We have recently seeded and launched two Asian hedge funds, one in Japan and one in Korea that adopt a value-based approach to equity investing. These funds are long-only absolute return vehicles, so they do not short stocks. However, like hedge funds, they charge performance fees, can go into cash and don't measure themselves against benchmarks. Our seeding arrangement also allows us to obtain a percentage of the fund's capacity for our clients and to share in the revenues of the fund with the managers.

For the Japan fund, we teamed up with Japan hedge fund manager Arcus, to launch the Arcus Japan Value Fund, which closed in December at $100 million. Earlier this year we launched the Cheetah Korea Value Fund with Cosmo, a Korea-focused hedge fund manager. This currently stands at $20 million.

Why do you prefer long-only absolute return over equity long/short?

It's not that we don't believe in the virtues of long/short. Rather we believe that Asia is more suited to a long-only value based strategy at this time. Shorting structures are still immature in many Asian markets and costs can be high.

Moreover, we see many opportunities to make absolute returns in Asia on the long side without bothering with shorting. The last couple of years have finally seen China and India embrace the equity culture, and the capitalist system has been integrated in Asia to a point of no return. Successive crises over the past 10 years, including the Mexican crisis, the Asian crisis and 9/11, have kept Asian equity valuations quite low. Now, with China and Japan in a period of synchronised growth the case for a value-based approach to investing in Asia is very compelling.

Japan and Korea are also promising markets for this strategy. Japan has a wide and deep selection of stocks, and is emerging from a 14-year bear market. Korea is currently very undervalued, and although there are greater risks associated with Korea, we feel that they have been over-discounted.

Why team up with managers who currently run equity long/short strategies to launch long-only funds?

We think that successful long/short managers such as Arcus and Cosmo have the right mindset to run absolute return long-only funds. Firstly, they are used to thinking outside of the index-hugging box and secondly they have proved that they have asset discipline and understand the importance of maintaining a limited fund size, to optimise performance.

Why do managers who have successfully raised assets for their long/short funds independently decide to partner with Cheetah for their absolute return funds?

Long-only absolute return funds do not necessarily have a big audience at the moment, compared to equity long/short funds. Partnering with Cheetah is an endorsement of the manager's ability to run a value-based strategy. It also means that we can market the fund, and they have access to our base of high net-worth investors in Hong Kong.

However, these funds have been appealing to a wider audience beyond the high net-worth. Recently, an industry-leading Asian fund of hedge funds invested in our Korean fund.

How do you justify a 20% performance fee for a long-only fund?

We get asked this question a lot. The main point to understand is that the performance fee sets the right incentives for the fund manager. It enables him to keep the fund size small, which is important for maximising performance and managing risk, particularly since the funds often invest in stocks where liquidity may be limited.

Are there any outside investors involved with Cheetah in seeding these funds?

Yes, we partnered with a high net-worth individual, Mr V-Nee Yeh, to seed the two funds. V-Nee is a well-known value investor in Hong Kong. He co-founded Value Partners, which is one of Hong Kong's largest homegrown fund managers with $2 billion in AUM. He also founded a private equity firm, VP Capital and a distressed asset management firm, Argyle Street.

Do your clients who invest in these funds view it as a hedge fund or an equity allocation?

Our clients are mainly high net-worth individuals and families in Hong Kong and they vary in size and level of sophistication. Those clients who view these investments in the context of their overall portfolio would include this as part of their existing portfolio of hedge fund investments. However, some of our clients view these investments on a standalone basis, and approach this as if they were financing a project. In the US such investors would be considered unsophisticated, but in Asia this is not necessarily the case. These investors still ask the right questions and understand which areas to dig into. But their focus is more on whether they think Korea or Japan is worth investing in, and whether they like the manager, rather than how this fits in with their overall portfolio diversification and risk/return.

What's next in the pipeline?

We are looking at a similar arrangement with a Thai-focused fund, and feel that this is a good time to get into Thailand. Although Thailand ran up a lot last year, it has also come down again this year. Earnings have also been catching up with valuations.