Walter Chang is the investment director of Hong Kong-based long/short hedge fund ROCIM. We spoke to him about his portfolio.

How are you performing?

Chang: This year we are flat on performance. We've had some capital inflows this month, but not from institutions. Instead of concentrating on attracting institutional money, we're looking closer at other sources such as corporates and high net worth individuals.

The funds of hedge funds to which we talk say they don't have any money to allocate, and those that do say that they will probably put it into the bigger hedge fund houses with a longer track record, in the hope of keeping capital safe.

Can't smaller funds keep down net exposure in order to emphasise capital preservation?

The volatility of this fund has been very low. We've kept gross exposure to no more than 70% and net exposure at plus to minus 10%. This has kept our monthly performance very steady.

At what point would you start to take a more directional approach?

When there are signs of corporate earnings picking up. There are opportunities that come from valuation, because stocks have been so sold down as if they would go bust. If you know these companies won't go bust then that's the opportunity, as valuations go back up to cheap multiples from their distressed level.

How do you know then if a company whose stock price is down 95% is going to go bust or not?

It is just research and market knowledge.

What is your market knowledge currently telling you?

Take HSBC for example, their results are due out on Monday. If they come out with a rights issue or fund raising of any sort I think that will be viewed very positively. In times like this the more money you have in your pocket the better, regardless of whether we are still in the middle, or at the end of the downturn.

An upward reweighting of HSBC's stock in the Hang Seng Index that is due next week will also have a positive effect, as index funds will have to be buyers.

What else are you seeing in Hong Kong and China?

The risk is still earnings downgrades. A lot of people are still complacent on forecasts. One stock we shorted was Cosco Pacific and both shipping and ports have suffered, as has the manufacture of container boxes. The latest thing on port activity in China is a growing price war as demand collapses. We shorted Cosco Pacific at a high level, now its coming down and its valuation is looking better. We haven't covered our short yet, but we are thinking hard about it.

What is your view on Hong Kong property stocks?

In February they were one of the worst performers. I think people were doing the trade of being long China property stocks and short Hong Kong property stocks because people thought the Government would save the Chinese property sector and sales volumes picked up as prices were cut. There was a string of good news for China property, so it became a popular trade.

With Hong Kong's unemployment rate going up, it may go to 6% by the end of this year, that will have an inverse effect on property prices. The Government doesn't have measures to support the property market here. Supply is already one of the lowest in Asia. When the Hong Kong economy corrects, the demand side comes into emphasis and property prices fall. Also rental prices are falling at a faster price than capital values.

Did you catch the bounce in mainland markets?

To some extent, in some of the cyclical names like shipping. We were also in commodity and property names.

Where will you be positioned in the future?

The financial sector may be coming to an inflection point after which there will be a rebound. Elsewhere in the world the news about Citi and Royal Bank of Scotland was well received by the market. Bernanke's speech said that key banks will be given oxygen to survive, they won't be nationalised and they won't be allowed to go bust. There will likely be Tarp 2 and Tarp 3 if needed.

In China in the last two months we're had a good rally, driven in part by the Rmb4 trillion ($586 billion) to the 10 selected sectors. That theme is largely played out and I think it will turn next to corporate earnings which may disappoint. But if that first Rmb4 trillion doesn't work, then given the size of the government's balance sheet, there may be another Rmb4 trillion. So that may be a theme for the second half.