The Hang Seng Index has gotten ahead of itself and is set for a 10% fall, say managers at Hong Kong hedge fund China Eagle Asset Management.

The portfolio managers of China Eagle Fund are Yuming Ying and Jason Yang who initially met while working for the Dragon Billion fund several years ago.

Ying then became a managing director at China Construction Bank’s asset management arm and Yang most recently worked as a portfolio manager with China Bocom Insurance Company, the overseas insurance arm of the Bank of Communications.

In late 2006 they launched China Eagle Fund which specialises in Hong Kong-listed stocks and today manages $28 million.

“We have three components to decision-making. As well as a qualitative and quantitative analysis of companies, we have a long/short model that looks at the index," says Ying.

"When the Hang Seng Index is higher than our fair value in-house model we reduce net exposure to 30-40%. We are envisaging the market could experience a 10% fall."

Their net exposure range is 40-90% and is usually around the 50% level. Today net exposure is 47%.

“We short using index futures, but we are never net short,” says Ying. “It is too dangerous as in the long term the market always goes up. Even if the index traded flat for a year, with earnings growth, stocks could easily become fair value again.”

The fund is up 19.25% to the end of October 2010. Its big year was in 2009 when it was up 88%. In 2008 it beat the index with a 25% fall. Since inception it is up 79.6%.