Zen Investment Cuts Commodities for Stocks After Beating Hedge-Fund Rivals

Shanghai Zen Investment Management Co., a hedge fund that beat 99 percent of its rivals this year by betting on commodities, is cutting its allocation in raw materials by 30 percent and likely to buy China and U.S. stocks.

The Zen Macro Strategic Fund may purchase equities in Asia including Hong Kong and India because falling commodity prices will reduce inflationary pressure, Jacky Cheung, chairman of Zen Investment, said in an interview at its offices in Shanghai on May 16. China’s financial and power companies are attractive because of valuations, he said, without naming any.

“With the decline in investors’ risk appetite, the commodities market may not have hit bottom yet,” said Cheung, 41. “Equities will be very good investments in the second half and next year.”

The Standard & Poor’s GSCI Index of 24 raw materials has fallen 12 percent from a two-year high in April as the dollar strengthened against the euro after the European Central Bank signaled it would hold off raising interest rates and concern intensified Greece will struggle restructuring its debt.

Cheung has cut the fund’s commodities allocation since late last month, saying a surge in silver prices is a sign that gains in raw material prices are excessive. Silver jumped 28 percent last month, the biggest monthly advance in 28 years, before plunging 27 percent in the first week of May on higher margin requirements.

The prospects of a slowdown in the global economy and a strengthening dollar have made commodity assets riskier, said Cheung. Global investors plan to put more of their money in cash and less in commodities over the next six months, a Bloomberg Global Poll of 1,263 investors, analysts and traders who are Bloomberg subscribers showed last week.

U.S. Stocks

Cheung’s fund, incorporated in the Cayman Islands, has returned 55 percent this year to April 28, the second-best performance out of 520 active hedge funds with a global macro focus, according to data compiled by Bloomberg. Zen Investment Management has $77 million in assets.

U.S. stocks are attractive because of valuations amid the prospect of a sustainable recovery in the world’s biggest economy, Cheung said. Employers added more jobs than forecast in April, the Labor Department said on May 6 in Washington.

Cheung expects inflation to ease in Asia, allowing countries including China to ease its policy tightening measures. The Shanghai Composite Index has fallen 6.7 percent from a five- month high on April 18 amid concern the government will keep adding to four increases in interest rates since October to slow inflation that accelerated at the fastest pace in three years in March.

‘Relax Tightening’

China’s stock measure trades at 13.2 times estimated earnings for this year, compared with a multiple of 19.9 over the past four years, according to weekly data compiled by Bloomberg. That compares with 14.4 times for India’s Bombay Stock Exchange Sensitive Index, 11.1 for the MSCI Emerging Markets Index and 13.4 for the Standard & Poor’s 500 Index.

“Given’s Europe’s debt crisis and declines in commodities, China is more likely to relax tightening policies than intensify them in the second half of the year,” said Cheung. “The current valuation of stocks is really low. There’s a big probability that stocks will have a decent rally.”

--Zhang Shidong. With assistance from Karen Qian in Beijing. Editors: Allen Wan, Darren Boey.

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-3040 or szhang5@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net