Nov. 12 (Bloomberg) -- QBridge Fund, which until December specialized in soured Chinese bank loans, is investing the majority of its assets in debt sold off by financial institutions and asset-backed loans to developers in the nation.

The $150 million fund, previously named QBridge China Fund, began to buy debt and convertible bonds sold off by hedge funds, investment and private banks tightening their balance sheets in mid-September, said Francois Buclez, its manager. Such investments now account for 10 percent of QBridge's assets and may rise to as much as 25 percent.

About $920 billion of credit losses and writedowns from the world's banks, insurers and securities firms have forced them to reduce risky investments. Hedge funds are also being forced to fire-sell assets to meet withdrawals that together with investment losses may slash industry assets by nearly a third from the $1.9 trillion in June.

``Right now we can find great opportunities and great value in that strategy'' of buying and holding good assets at fire- sale prices, Hong Kong-based Buclez said in a telephone interview yesterday.

In public deals, almost $19 billion of high-yield and unrated bonds in the Asia-Pacific region are maturing before the end of the year, according to data compiled by Bloomberg.

QBridge, run by Cube Capital Group, prefers credit instruments issued by Chinese property developers, having gained understanding of the nation's real-estate market from the recovery of non-performing bank loans, Buclez said.

Bonds of Chinese developers with sound balance sheets, good cash flow and low debt ratios can now be bought at 30 cents to 45 cents on the dollar, generating annualized yields to maturity of 40 percent to 60 percent, Buclez said.

``We're slowly ramping that up; we're not in a hurry,'' he added. ``We don't think there's going to be a massive recovery on these assets right away because there's a selling pressure. There's a lot of inventory to be disposed of.''

Fund Performance

QBridge has gained each month since its December 2006 inception, returning about 8.6 percent this year through October, Buclez said. Five Asia-focused distressed assets funds lost an average of 8.2 percent in the same period, based on two of them reporting October performances, according to Singapore-based data provider Eurekahedge.

QBridge, which makes 95 percent of its investments in China, also uses about 35 percent of its assets to provide six- to nine-month loans of about 100 million yuan ($14.7 million) each to cash-strapped Chinese developers, secured with their real estate projects, Buclez said.

Chinese developers are turning to hedge funds for loans after banks tightened lending to the industry in answer to a government call to cool overheating, and a stock market slump halted stock sales.

Inland Focus

QBridge has extended at least six such loans since December, charging Chinese developers, including publicly traded ones, interest in excess of 20 percent. About four loans remain outstanding, Buclez said.

QBridge prefers to lend to less-known, less-debt-ridden developers that operate in smaller, inland Chinese cities, he added. Property prices have held up better in such places than coastal cities because people tend to buy housing to live in rather than as investments, he said. Supply and demand are more in balance and housing is more affordable.

Property prices in 70 major Chinese cities rose 1.6 percent in October from a year earlier, according to the National Development and Reform Commission. That was the slowest pace in more than three years.

To better protect itself from falling Chinese property prices, QBridge lowered the ratio of loan to the value of security to 30 percent, from 50 percent earlier, Buclez said. The fund doesn't intend to further increase its lending to developers.

NPL Loans

QBridge hasn't bought new non-performing Chinese bank loans for five months. The state-owned, non-performing loan clearing houses in China aren't under as much pressure as their international peers to cut prices to sell assets, Buclez said.

``We haven't seen prices matching what we have seen in other markets,'' he said.

Buclez, who headed Credit Suisse Group's investment banking unit in Russia between 1995 and 2001, co-founded Cube Capital Group in 2003. Cube manages $1.1 billion of hedge, real estate and fund of funds in Asia, Central and Eastern Europe.

Cube in September started a $20 million Asian real estate securities fund that invests in high-yielding publicly traded property stocks, debt and real estate investment trusts, said Buclez.

``The property securities here in Asia have been hammered by the global liquidity crisis and the U.S. property market, while the fundamentals of Asian real estate are completely different from U.S. and Europe,'' said Buclez.

For example, Japan property stocks now generate dividend yields of 8 percent to 20 percent in the local currency.

Cube plans to grow the fund to $50 million with money from existing investors in its other funds before opening it to others.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

Last Updated: November 11, 2008 23:18 EST