Taiwan hedge fund expanding investor base to institutions

Prophet wants to add institutions to its existing high-net worth investor base.

Albert King, founder of Taiwan-based hedge fund Prophet Capital, discusses his investment strategy and capital raising plans.

How large is your fund at the moment? Is it still open for further investments?

We currently have close to $10 million under management. We launched our fund in the fourth quarter of 2002 and are still at the seed capital stage. At the moment our investors are all high net worth private individuals based in Taiwan and overseas. We expect to start raising funds from institutional investors once the elections in Taiwan are over. We plan to access these investors with the help of Goldman Sachs, who is our prime broker. Our first target will be non-Taiwan Asian investors, but we'll also be talking to the more established investor community in the US and Europe.

How would you describe Prophet's investment strategy?

We're a long / short equity fund, but have a multi-strategy approach. Our investment decisions are driven by fundamental research and based on relative valuation ideas, special situations and expectations of stock movements due to cyclical changes. When we started our fund we had a Taiwanese technology sector bias. However we also invest in South Korean and US tech companies that buy from, sell to, or compete with the Taiwanese companies in our portfolio.

Two or three months ago we expanded our strategy to included non-tech companies in Taiwan, as we believe these have the potential to perform very well given the change in the global macro environment, particularly the weak US dollar. Although this will affect all emerging markets, since we are on the ground in Taiwan we tend to focus on stocks here.

We are quite unique as there aren't many hedge funds with a Taiwanese focussed strategy.

Do you invest in Chinese tech companies?

No, we don't see a comparable tech sector there at the moment. It is still a bit early days for China. But I would definitely see this as a potential market in the future.

Do you conduct company visits in Taiwan?

Yes we do. And we're very thorough about our visits. We meet with various layers of the organization, including the business as well as the financial side.

What type of stocks do you have long and short positions in at the moment?

We are long those stocks we think are going to benefit from a boost in Taiwan's domestic demand. This includes airline and financial plays. On the tech side, we are long small cap Taiwan techs. We're currently shorting the cyclical tech plays such as the semiconductor manufacturers and TFT LCD players. We think that the recovery side of the tech cycle has been going on for some time and it will become increasingly harder for these cyclicals to perform.

What effect do you think the upcoming election in Taiwan is going to have?

This election is a very tight race. It is going to be a discreet point in Taiwan's market performance, as the result will have a major effect on market expectations. The election represents a major risk factor at the moment and I wouldn't expect any major market movements before March 20th. If the opposition party wins, I think you will see investment confidence in Taiwan restored. We will also see an improvement in the cross- strait relationship, which will be good for industries that depend on tourists, such as airlines.

What type of returns did Prophet realize in 2003?

Our target returns are between 20%-30%. However, in 2003 we broke even and our returns were zero. Our strategy does not particularly benefit from market rallies like that which occurred in the last few months of 2003.

What is the background of you and your team?

I have been working in the Taiwanese investment sector for over ten years with CSITC, which was the largest investment company in Taiwan. I started there as an analyst, and by the time I left I occupied the position of CIO. I left in 2001 shortly after the merger with HSBC asset management to set up Prophet Capital.

At the moment, my team consists of one other analyst who has a background in the technology industry and focuses on the company research.

Do you expect to hire more people?

Yes we will be expanding head count as our asset size grows. I would say that by the time we have about $30 million assets under management we will add at least two more team members.