Martin Currie is closing its China Hedge Fund, marking the end of a once well-performing strategy after the firm was hit with $14 million in fines from US and UK regulators this year for failing to manage a conflict of interest between two clients.
The decision to shutter the fund was “driven by its small scale and low expectations of future growth”, a spokeswoman from the $7.4 billion UK asset manager tells AsianInvestor.
Set up in 2002, the fund had been operating with less than $10 million in AUM “for some time”, she notes. “Liquidators have been appointed and the process of bringing the fund to conclusion is ongoing.”
The long/short equity strategy had managed as much as $200 million in 2010, at a time when it had an annualised return of about 16%.
The closure marks the end of an unfortunate turn of events, which in the interim has also seen the former managers of the vehicle go on to establish a new fund management firm.
Chris Ruffle and Ke Shifeng had run the China fund out of Shanghai, initially as staff of Martin Currie before setting up in 2006 as Heartland Capital Management, which was 70% owned by Ruffle and 30% held by Ke, and which oversaw management of the strategy.
It focused on mainland companies, taking exposure to China A- and B-shares, and stocks listed in Hong Kong, Taiwan, Singapore and the Nasdaq exchanges.
Ruffle left Martin Currie in July 2011. It was around that time that investigations into the fund by the US Securities Exchange Commission and UK Financial Services Authority came to light.
The SEC stated that in the early 2000s that Martin Currie China Hedge Fund accumulated a position worth $17 million in Hong Kong-listed printer cartridge recycling company Jackin. When Jackin fell into financial difficulties in 2009, another Martin Currie vehicle, called China Fund Inc, subscribed to $22.8 million of bonds through a subsidiary called Ugent.
The transaction enabled the China Hedge Fund to redeem, at par, $10 million of the Jackin bonds it held; China Fund Inc sold the bonds it purchased from Ugent two years later at a 50% loss.
In May, Martin Currie was fined $8.3 million by the SEC and $5.6 million by the FSA, with the UK watchdog citing a “clear conflict of interest” in the transaction. The firm paid a further $20 million in total compensation to investors.
After the fines were announced, Martin Currie stated that “significant improvements have been made to our business including reinforcements to our governance function”.
Ke had temporarily stayed on with the fund following Ruffle’s departure, but later joined him in a new venture. A statement in mid-2011 by Martin Currie, which announced Ruffle’s exit, also outlined Heartland’s intention to acquire Martin Currie's 50% interest in MC China, a joint venture by Martin Currie and Heartland, which includes “the services of [Ruffle] and [Ke], as well as a team of analysts based in Shanghai”.
James Chong, Martin Currie’s investment manager for Greater China, took over management of the China Hedge Fund portfolio from August 2011, says the firm’s spokeswoman. “He continues to manage our long-only multi-cap China strategy, including our OEIC and Sicav funds.”
Martin Currie last year formed a relationship with Singapore-based APS Asset Management, appointing them as sub-advisor for certain client accounts totaling $147 million, enabling them to offer China and Taiwan equity management to clients.
Meanwhile, in November 2011 Ruffle and Ke set up Open Door Capital Management, a China-focused asset manager with operations in San Francisco and Shanghai.
Supported by analysts that were part of the MC China team, they reportedly launched a China Absolute Return Fund in March with about $75 million in initial capital.