Tat AuYeung, formerly head of proprietary equity trading for HSBC in Hong Kong, has joined forces with New York-based hedge fund Apex Capital to launch the Apex-Guotai Junan Greater China Fund. The mainland's Guotai Junan Securities is a strategic minority partner in the new fund.

The equity long/short fund has launched with approximately $12 million under management and invests principally in China related stocks in Hong Kong, Taiwan, South Korea and the US. The fund currently does not invest directly in China's stock market, but intends to do so in the future.

AuYeung joins Andrew Beer, Avi Faliks and Chung Lew as the key principals in the fund. Beer and Faliks are the co-founders of Apex Capital. Beer is also founder of $400 million fund-of-funds company Pinnacle Asset Management.

Faliks previously ran a long/short quant fund, and was head of the statistical arbitrage trading desk at Bear Stearns.

In mid-2003 Chung Lew, previously head of international trading at US Trust in New York, joined the Apex team.

Seeing a strong demand for a China-focused product from US investors, Lew contacted HSBC's AuYeung, whom he had known since the mid-1980s when the two worked together at Salomon and Dresdner Kleinworth Benson.

AuYeung says he saw great opportunities for a China fund as China's markets open up and given pending approval for qualified domestic institutional investors (QDII), which will further boost volume flows. He left HSBC to set up the new China fund with Apex, bringing along with him two traders from HSBC, Alden Cheung and Alex Au, each of whom has over a decade of trading experience.

AuYeung and the two traders run the portfolio from their Hong Kong-based office, while Chung Lew monitors the fund overnight from New York. Avi Faliks, also based in New York, takes responsibility for risk management, using a real time risk management system to track the funds country, industry, currency and beta adjusted exposure.

Beer and Faliks manage most of the marketing for the new fund out of New York, although Guotai Junan will also market the product to its Asian high net worth clients. "The partnership with Guotai also assists the fund with access to research, information and trade flows," says AuYeung.

AuYeung explains the rationale behind the fund was to create a vehicle where investors could gain exposure to the China growth story, but still enjoy an attractive and consistent return in all market environments. He expects the fund to return approximately 25% per annum with a volatility of below 15% and a Sharpe ratio above 1.5.

"The Hong Kong market has a high intraday volatility driven largely by retail sentiment. There's a tremendous opportunity to exploit these sentiment changes which produce quite dramatic movements in the market," says AuYeung.

AuYeung explains the team are well positioned to get a sense of the retail and institutional fund flows in the market and to capitalize on the opportunities this presents.

"We have 60 years of combined investment experience, and have developed a strong contact network in the industry and familiarity with the markets and companies," he comments.

"We also have an edge because we're all locals and this helps us access a wider base of information sources."

AuYeung points out that in his current position he sees more information flow than when he was at HSBC, where he was limited to accessing in-house research and brokers.

In addition to fund-flow analysis, AuYeung says Apex pays close attention to macro factors and fundamental analysis when making investment decisions.

"We also take a macro view in our portfolio. For example, if an important number is going to come out from the US overnight, such as the GDP figure, we trim our positions before hand," he says. "We will also be taking into account factors such as the July 1st demonstrations."

He emphasises that getting to know the companies through company visits and fundamental analysis is also a key part of the investment decisions.

"Of course, fundamentals are always affected by sentiment, but at the back of your mind you need to know the companies you're trading very well. Only then can you understand the true downside risk you face. If you don't know the companies, that's not trading, it's punting."

Merrill Lynch has been appointed prime broker for the new fund and HSBC is the fund administrator.