Value investing and arbitrage strategies have long been employed in Asia, but combining them in one product is uncommon in the region, argues trading veteran Manuel Schlabbers, who will start at SinoPac Asset Management on March 1.
That was one of the motivations behind the firm developing a hybrid strategy that will invest in small- and micro-cap stocks, while seeking arbitrage opportunities, initially in exchange-traded funds.
Another plus point in combining small-cap value investing with arbitrage is that both are not covered extensively by sell-side research. Both areas can generate good performance, as they tend not to get much attention from hedge funds, Schlabbers tells AsianInvestor.
Slated for launch in early March, the Accudo Asian Value Arbitrage Fund will be SinoPac AM’s first ‘liquidity-constrained’ arbitrage strategy, he notes.
With initial capital from SinoPac and Schlabbers himself, the firm hopes to grow the fund to $30 million by end of this year. It has a capacity of around $200 million, he says, because if were to grow bigger than that, it would be hard to find enough investment targets offering the required return.
The strategy will seek arbitrage opportunities between ETFs and other listed products such as closed-end funds and futures. It will predominantly trade in Australia, Hong Kong, Korea, Japan, the Philippines, Singapore, Taiwan, Thailand and Vietnam.
The fund aims to beat the MSCI All Country Asia-ex Japan index by at least 5% per annum over five years. It will target high-net-worth individuals, family offices and fund-of-fund managers.
Liquidity-constrained strategies favour executing smaller-size trades over larger, more liquid listed products, says Schlabbers, and are therefore likely to face less competition from larger institutional managers that run portfolios of over, say, $500 million.
Such an approach will also typically involve shorter holding periods than value strategies – which will tend towards long-only exposure, potentially for several months.
Opportunities for liquidity-constrained arbitrage tend to multiply when market volatility rises, given that that’s when there is more likely to be mispricing, says Schlabbers. “This serves as a natural diversification and tends to mitigate the effect that a falling market will have on the long-only, small-cap value investing part of the strategy.”
Schlabbers has eight years of trading experience in trading ETFs – notably arbitrage strategies – for Morgan Stanley and more recently Credit Suisse in Hong Kong, where he was head of structured finance and delta one index trading.
SinoPac AM’s $200 million portfolio also contains long-only fixed income and equity strategies, and a managed futures fund.
SinoPac Solutions and Services will administer the new fund.