Shanghai boutique fund house Bohong Fund Management is launching its Bohong China Arbitrage Fund. The fund is designed to trade across multiple asset classes and gain by arbitraging prices between an inefficient China market and overseas China-related securities.

The fund is registered in the Cayman Islands and will be run out of Shanghai and Hong Kong. Bohong says the low level of education among Chinese investors for complex instruments and the highly speculative nature of market movements in China mean investors can take advantage of such market inefficiencies.

Bohong expects a renminbi appreciation and more qualified foreign institutional investor (QFII) participation in China to be among the factors affecting trades. The Shanghai fund house will be among the first batch of domestic funds to tap into program trading and quantitative strategies in the country.

Depending on market conditions, 30-80% of the fundÆs assets will be focused on the domestic China market through QFII channels. In its home market, it will trade ETFs through discount arbitrages and event-driven strategies.

Its quantitative model also follows selective IPO, stock splitting, share replacement and changes in trade mechanics. The China portfolio also makes allocation for index futures, options, convertible bonds shorting and fixed-income and credit-related derivatives.

The portfolioÆs holdings are matched to the fundÆs Hong Kong and other overseas markets trades. Its multiple focuses in more mature markets means it will unwind its holdings with gamma, volatility short strangle and straddling techniques.

Minimum subscription is $1,000. Subscriptions and redemptions to the fund are processed monthly. Its prime broker and custodian is Merrill Lynch, while Sidley Austin and Walkers are the lead legal advisor and offshore legal advisor, respectively.

Bohong says China will continue to present enormous opportunities for the longer term. However, investors will have to pay for the privilege û the fund charges a 1.5% annual management fee that will be deducted quarterly. Also, 20% of the appreciation in the fundÆs NAV will go into its managerÆs performance bonus, subject to its high watermark or performance hurdle.

Any redemption within the first six months of holding will be subject to another 2% in redemption penalty.

Bohong Fund Management was set up in 2003 with the aim of introducing state of the art technology into securities trading in China. The company is headed by its CEO and CIO, Liu Yun, a chemist graduate of Shandong University and Nankai University. Previously, Liu was a lecturer of marine biology in the Ocean University of Qingdao.