Ex-Deutsche Bank Saba Prop Trader Leads Hedge Fund to 200% Gain
Prudence Investment Management CIO Chad Liu
Dale de la Rey/Bloomberg
Chad Liu, chief investment officer at Prudence Investment Management (HK) Ltd.,
Chad Liu, chief investment officer at Prudence Investment Management (HK) Ltd., Photographer: Dale de la Rey/Bloomberg
Prudence Enhanced Income Fund, led by former Deutsche Bank AG (DBK) Saba proprietary trader Chad Liu, returned 200 percent in two years trading credit and convertible bonds sold by Chinese companies internationally.
The Hong Kong-based hedge fund, which started in January 2009, beat the Eurekahedge Asia Fixed Income Hedge Fund Index’s 35 percent gain in the same period. Assets increased to more than $250 million from $30 million, Liu, Prudence Investment Management’s chief investment officer, said in an interview yesterday.
Prudence profited by picking up bonds whose value recovered from the lows during the global financial crisis, helping drive a China dollar bond index compiled by JPMorgan Chase & Co. 34 percent higher since October 2008. HSBC Holdings Plc estimated last month that new issuances of dim sum bonds, yuan-denominated debt sold in Hong Kong, may rise to as much as 150 billion yuan ($23 billion) this year.
“The market overall is still robust, if you look at new issues and the response to new issues,” said Liu, 39. “In this part of the world, a lot of the financing is still mostly for growth,” instead of funding leveraged buyouts or refinancing old debt as is often the case in the U.S. and Europe, he added.
The fund also tried to time market turns last year and traded pairs of bonds mispriced relative to each other after the bond price recovery in 2009, said Liu.
Nine Dragons
The fund returned 98 percent in 2009. Half of the returns came from buying cheap credit and selling short overpriced bonds, and the other half from trading debt affected by events such as new bond sales, buybacks and refinancing, Liu said. Short selling involves selling borrowed securities with the expectation they can be bought back cheaper.
One of its best trades was Nine Dragons Paper Holding Ltd., China’s biggest maker of containerboard for packaging whose profit plummeted 69 percent in the six months ended December 2008 amid the global recession and raw material costs. Prudence started to buy Nine Dragons bonds when the company made an offer in February 2009 to buy back its five-year notes at 53 cents on the dollar.
Prudence paid a notch over the company’s offer, believing the Nine Dragons’ results would improve and taking the buyback as evidence of financial health. It sold the bonds in July for a profit when Nine Dragons made another tender offer for bonds at their face value, Liu said.
Relative Value
The Prudence Enhanced Income Fund returned 48 percent last year. An estimated 20 percent of the gain came from relative- value trades as the bond market became more volatile, Liu said. Relative trades seek to profit from the mispricing of two related debt securities such as between bonds and convertible bonds or two bonds with different maturities issued by the same company.
It also tried to time market turns, selling its holdings in March last year and buying during the May correction, Liu said. The fund returned 3 percent in the first three months this year.
Bond sales being marketed and in the pipeline as well as responses to them highlight demand for debt sold by Chinese companies will remain strong, Liu said.
The government and companies sold a record 35.7 billion yuan of dim sum bonds in Hong Kong last year, twice the 16 billion yuan in 2009. Yuan deposits in Hong Kong hit a record 407.7 billion yuan in February, six times the year-ago figure, according to the Hong Kong Monetary Authority.
Income Fund
Liu traded Chinese bonds, stocks and private placements for two years for Deutsche Bank’s Saba desk, which once managed $10 billion. He left in late 2008 to set up Prudence with ex- Deutsche Bank private banker Wang Yuan and Philip Wu, former chief executive officer of Wing Lung Bank Ltd. before the family-controlled Hong Kong bank was sold to China Merchants Bank Co. in 2008. Wu provided the majority of the initial capital of Prudence’s maiden fund, Liu said.
In January, Prudence started the Prudence RMB Income Fund, which buys and holds dim sum bonds and yuan-denominated dollar- settled bonds sold by Chinese companies, said Mason Wu. Wu, son of Philip Wu, joined Prudence as a partner in January and co- manages the fund with Liu.
Prudence started the fund, which does not short sell, after China eased restrictions on companies and institutions to buy yuan, resulting in a changing mix of investors in the traditionally retail-dominated dim sum bond market, said Wu.
The fund started with $20 million and has grown to more than $50 million, raising money from Asian insurers and other companies, said Liu. It has returned about 7 percent, he added.
“The turning point has arrived,” added Liu. “The market has certainly become big enough and liquid enough for institutions to get in.”
To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.
To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net
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