Skybound Capital has become the first South African fund-of-hedge-fund (FoHF) manager to set up in Hong Kong as it seeks to double its AUM to $500 million within three years.
Chief investment officer Michael Tostée moved to the city late last month to head the business, while Theodore Shou, who joined from a Hong Kong family office on October 1 and previously worked on manager selection at HSBC Private Bank, is responsible for portfolio management.
Skybound, which has $275 million in total AUM, received its type-9 asset management licence from Hong Kong’s Securities and Futures Commission last month. It has transferred management of its two Asia-focused products to the new office: the Dragonfly Asia Pacific Fund and the China Red Fund, which were both established in 2006.
"We believe that China, and Asia, are going to be superpowers in the next 10 to 15 years," says Skybound founder and chairman Clifford Warren, who is based in Cape Town but travels to Asia every two or three months.
Dragonfly Asia and China Red are both FoHFs which hold a variety of underlying strategies, with a strong bias towards long/short equity hedge funds.
China Red has 11 underlying hedge fund managers at present and Dragonfly 13. Tostée says that there are generally 10 to 15 funds within each FoHF, with the number varying because the portfolio is managed actively.
The Dragonfly fund focuses on Greater China, Australia, Japan and Southeast Asia, while the China Red Fund primarily invests in managers (mostly located in Hong Kong) with broad exposure to companies deriving a significant portion of their earnings from mainland China.
Skybound says it aims to identify and partner more Asian hedge fund managers, including those in mainland China as well as Hong Kong subsidiaries of Chinese fund houses.
“When we first start to work with a fund manager, we will have a small allocation and monitor the performance. Due diligence is an ongoing process,” Tostée says. “We don’t think performance can be repeated, but processes, skills and disciplines can.”
Skybound's initial plans are to grow its client base of high-net-worth individuals in Asia, where it is also in talks with family offices in the region, says Warren. The firm aims to continue building up the track record of its funds and will grow its total AUM to $500 million before establishing a platform for institutional investors and reaching out to sovereign wealth funds, he adds.
About 60-70% of Skybound's investor base is South African, with the remainder mostly based in the UK and Europe, says Warren. They are mostly high-net-worth individuals and a few family offices.
The firm also has a small but growing number of Asian investors which are largely invested in the China Red FoHF, although they have also shown "considerable interest" in the firm's four South African funds, Warren notes.
Skybound has three South African-focused FoHFs and one long/short equity fund, which is managed internally. The funds of funds have separate themes, spanning global multi-strategy and global corporate bond products as well as micro-lending in Africa.
The firm says it adopts a multi-disciplinary approach rather than the typical FoHF model. Tostée points out that, besides employing the investment capability of selected managers, Skybound also actively adjusts its exposure and co-invests.
“In our China Red Fund, under current market conditions we have reduced exposure to long-time-horizon fund managers and are focusing more on managers skilled in momentum-trading to capture short-term mispricing opportunities,” he explains.
Warren acknowledges that the chief drawback of FoHFs is liquidity constraints since most hedge funds only offer quarterly liquidity. But he argues that reserving room for active co-investment enables the fund to better protect against downside risk and generate more cost-effective alpha.
“Three days after the Japan earthquake [on March 11] when the market went down 15%, we built long positions in ETFs in both Japan and Taiwan and the Dragonfly Asia Pacific Fund was up one per cent for that month,” he cited as an example.