China’s rising inflation has led several prominent hedge fund managers to predict a bubble-burst in the economy, followed by more modest growth than in previous years.
But a dissenting view is held by Dale Tsang, manager of the $62 million IDAM China Multi-Strategy Fund, which has a portfolio of long positions in selected Chinese sectors.
“We are very long,” says Tsang, whose fund has a large exposure in the financial industry, with smaller positions in the energy and consumer sectors. He acknowledges that his perspective is not widespread among peers. “China has been out of favour for a little while. A lot of my hedge fund friends are shorting.”
Among the most outspoken China naysayers is Jim Chanos of New York-based Kynikos Associates, who asserts that an overheated property sector has put the mainland on “a treadmill to hell”.
Tsang, who served as managing director of Polaris Capital (Asia) before setting up Hong Kong-based Imperial Dragon Asset Management in 2007, has a more optimistic outlook, although he foresees that the market rally which has buoyed China stocks this month will eventually hit the skids. “There will be a correction in the marketplace that will be quite significant, but I don’t know the timeframe yet.”
China’s prudent financial controls will help to contain inflation, predicts Tsang, who despite his bullish long-term view is constantly monitoring market movements in case the fund needs to switch its exposure in certain sectors. If necessary, the entire portfolio – which is invested in Chinese companies listed in Hong Kong, Singapore and the US – can be liquidated within a day.
“We’re not invested in real estate and not with companies with price-to-earnings ratios of more than 20,” notes Tsang. The consumer industry is one in which he treads with caution, because of growing labour and rental costs. Over the past 12 months, investors have conversely been piling into the sector with the widely held mindset that the mainland is populated by 1 billion consumers. During that time, IDAM has reduced its exposure in that area through the sale of stocks, as Tsang typically does not short-sell securities. “Whenever we short, we usually short using futures.”
His methodology has so far served the IDAM fund well. The strategy returned 29.54% in 2010 – versus an average 8.97% return last year by its peers in the Eurekahedge Greater China Hedge Fund Index – and 16.82% in 2009.
Tsang reasons that China is poised to benefit this year from generally more negative market sentiment elsewhere, stemming from the Japan earthquake, political turmoil in the Middle East and instability within the eurozone. The mainland economy could surpass that of the US within the next five to 10 years, he believes.
“We believe the political system and manoeuvrability of the economic system can lead China’s economy to a new frontier.”
There were 103 Asian hedge fund closures in 2010, of which 17 were in Hong Kong, 11 in Singapore and 22 in Japan. The total number of closures so far this year is five, of which one was in Hong Kong and none were Japanese or Singaporean.