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The fund will be a Cayman Island vehicle managed by the $28-billion New York-based hedge fund Paulson & Company, which specialises in merger arbitrage, event-driven and distressed investing. Paulson is famous in investment circles for aggressively betting against US subprime home loans, and correctly calling the market. Its funds, including the Paulson Credit Opportunities fund that was set up to take advantage of potential US mortgage turmoil, produced around $12 billion in profits according to estimates.
Paulson has managed a corporate arbitrage fund for Sun Hung Kai Financial since April 2004. That corporate arbitrage fund, also exclusively for professional investors, gained 18.55% last year and 106.58% in 2007, outperforming many of its peers during those periods. Paulson, which has a track record of 14 years, focuses on capital preservation, above average returns and low volatility compared with the broader markets.
The new recovery fund aims to benefit from the current turmoil in the financial sector, rather than run away from it. After all, while the big picture is already expected to be gloomy, new disclosures or developments are still expected to continue unnerving investors. Companies will continue to reveal the state of their balance sheets, there will be more funding cost requirements, additional write downs and more dilutive capital raising from companies in need of cash.
ôThereÆs going to be a lot more pain before we can see any real signs of a recovery and the financial turmoil will continue to unfold over the next few months,ö says Rizal Wijono, managing director at SHK Fund Management.
For this new fund that it will manage for Sun Hung Kai Financial, Paulson will be looking at a basket of 100 financial stocks globally and will be going long on the ones it expects to survive the prolonged economic recession and current financial market turmoil. It will short the stocks that are expected to fail or perform poorly. Paulson has a team of fundamental analysts that screen the universe of financial companies worldwide and they look at various criteria including reserves and levels of bad debt.
Initially, the fund will likely focus on the developed markets of the US and Europe, and Canada to some extent, where balanced sheet disclosures are more transparent.
The fund is not a pure global long/short equities fund. It will also invest in secondary offerings and private capital raising by listed companies as well as make capital available for recapitalising failed institutions. The objective is for the fund to ultimately have a long-bias when the global economic environment and market sentiment improves.
The fund has secured a capacity of $100 million. The annual management fee is 2% for three share classes and 50 basis points for an institutional share class.
SHK Fund Management, the alternative investments specialist within Sun Hung Kai Financial, expects long-term investment opportunities in both public and private companies in the financial sector û specifically undercapitalised banks and financial institutions ûfocusing on public equity securities; secondary offerings by public companies; private capital raises by public companies and the recapitalisation of failed institutions.
ôStock selection and timing are absolutely critical when it comes to picking the right financial companies to realise returns for investors,ö says Wijono. ôThe vast majority of these capital injections to date have been too early, particularly with many global financial firms still facing significant write downs and credit losses, dilutive capital raises and declining corporate earnings.ö
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