Xingtai Capital plans to launch a China long/short equity hedge fund solely focused on the mainland consumer sector with a capacity of $500 million.

Hong Kong-based Xingtai, founded by former Lunar Capital executive Michelle Leung, has been running the strategy under a Ucits IV structure.  Sources say it launched in May with $30 million, and has annualised returns of over 12% as of the end of October.

The firm plans to expand the offering to include a Cayman Islands vehicle in early 2014, says Leung, Xingtai’s chief executive. It aims to make the product the largest consumer-focused hedge fund focused on China. It will be a niche offering, with few other competitors in the region, she notes.

“We think it is a good time to invest in China, but focused expertise is required,” Leung tells AsianInvestor. Leung identified a gap in the market for a long-biased fund dedicated to listed consumer companies. She launched the fund earlier this year with a team including Stan Buncher, who also spun out of Lunar Capital and is Xingtai's portfolio manager.

The portfolio will be concentrated, with the long book comprising 15 to 25 stocks in the mid- to large-cap space, although it will occasionally consider some small-caps.

Xingtai is currently focused on H-shares – Hong Kong-listed stocks of consumer companies with business in China. “The ones with the longer track record are all listed in Hong Kong,” says Leung. But the company "intends to invest in A-shares in the future".

The portfolio will be hedged by index puts and trading in and out of cash, with the aim of protecting the value of the long book. “We consider ourselves to be long-term investors.”

“We try to benchmark listed Chinese companies against global public consumer businesses,” adds Leung.  

Chinese consumer companies trade at a relative discount, despite greater scope for growth given the mainland’s demographics. “We see strong consumption trends in China,” she adds.

Alternative funds targeting China’s consumer sector have long been the domain of private equity. Xingtai will take a PE-style approach in its stock selection process, applying operational know-how of Chinese companies gleaned from the founders’ experience at Lunar, a Shanghai-based PE firm focused on the mainland.

Xingtai has a seven-member research team based in Shanghai. Whereas hedge fund managers typically only meet with managers of listed companies, Xingtai will additionally meet with the company’s distribution channels, suppliers, customers and competitors.

It will offer monthly liquidity and a portfolio of listed companies, differentiating itself from PE funds, which typically invest in privately-owned companies and lock up investor capital for about seven years. “We think there’s an appetite for a liquid, long-biased consumer fund,” says Leung. 

Xingtai’s Ucits fund has an investor base of family offices based in the West. The firm is in talks with more family offices and also European and US endowments and pensions with the flexibility to invest in funds with shorter track records.

“The strategy has resonated well [with investors]. They like the pure consumer theme," says Leung, adding that the team's operating experience with Chinese companies is a bonus. 

Arisaig Partners, based in Singapore, arguably runs the most well-known consumer-focused hedge fund in the region. The $3.2 billion long-only Arisaig Asia Consumer Fund focuses on the region's emerging markets.