Hong Kong-based Oasis Management is eyeing entry into China's onshore convertible bond market via a new strategy, sources have told AsianInvestor.
If true, the company founded by hedge fund veteran and CIO Seth Fischer would appear to be taking the view that onshore mainland convertibles – particularly those of A-share large-cap firms such as top banks and large corporations – is cheap.
It would see some of its biggest returns in the long book when there is a rally in the A-share market.
Oasis is understood to be proposing to offer the investment idea through an executive share class in its existing Oasis Investments Master Fund II - a global multi-strategy vehicle. The idea would be available in both hedged and unhedged classes, with a capacity of $250 million, according to sources.
Oasis had about $3.3 billion in pre-crisis AUM, but is now said to run just under $200 million across Master Fund II and a proprietary trading vehicle, which both invest globally. A new fund could help Oasis to diversify and increase its assets.
Oasis declined to comment for this article when approached by AsianInvestor.
If it launches this strategy, Oasis would join a list of hedge funds that are in the market for mainland convertible bonds. Northwest Investment Management, based in Hong Kong, also has a focus on Chinese convertibles.
Additionally, there are a number of managers in the region that have an Asia-focused investment mandate including the option of having portfolio exposure to onshore mainland CBs.
Given the poor performance of the A-share market, with the Shanghai Composite Index down 6.75% last year, some investors are looking at the onshore convertible bond market as a relatively cheap way of gaining mainland exposure.
Average returns on CBs last year were about 4.5%, nearly equal to the yields of long-duration government bonds.
Eager to boost liquidity in its capital markets, China has been easing foreign ownership restrictions in the onshore CB market, which is dominated by domestic investors.
In 2013, there were $14.6 billion in renminbi deals sold in the domestic convertible bond market, Dealogic figures indicate, which is shy of the record $15.4 billion level in 2010.
In 2011, Hong Kong’s Securities and Futures Commission publically reprimanded Oasis Management (Hong Kong) and its CIO Fischer and fined each of them HK$7.5 million ($961,500) for their trading in the shares of Japan Airlines Corp. on the Tokyo Stock Exchange in 2006.
In a statement, the SFC alleged that Oasis entered a series of orders for JAL shares in the last 15 minutes before market close on July 19, 2006, including market-on-close buy orders and cancelling them subsequently; and a large volume of short-sell orders, some of which were incorrectly labelled. On settlement day Oasis failed to deliver shares in nearly 70% of the shares they had short sold, with about 50% of these transactions having to be covered by new shares issued by JAL in its public offer.
The SFC alleged that Oasis' trading strategy appeared to have been designed to drive down the closing price of JAL on July 19.
Oasis and Fischer did not admit their strategy was designed to mislead the market for JAL shares but agreed to accept the sanctions. The regulator took account of their clean disciplinary records and cooperation. It also noted they had voluntarily taken steps in 2007 to reduce any similar concerns by imposing internal guidelines.