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Northwest Seeks to Raise $250 Million for Asia Stock Hedge Fund

Northwest Investment Management Ltd., a Hong Kong-based company sold by RAB Capital Plc in 2009, plans to raise $250 million in a year for an Asia-focused stock hedge fund, said Chief Executive Officer George Philips.

The market-neutral Northwest Equity Alpha Fund, which won’t bet on general market direction, is slated to start trading in early April, Philips said in an interview yesterday. The six principals of Northwest, the manager of $750 million assets that Philips co-founded with David Rogers in 1998, will contribute an unspecified amount of the initial capital, he added.

Northwest is tapping institutional investor demand for stock hedge funds whose performances do not move in tandem with the broader markets and with competitors, Philips said. The Eurekahedge Asia Long/Short Equities Hedge Fund Index, which tracks a strategy that invests in rising and falling stocks, was 89 percent correlated with the MSCI Asia-Pacific Index from 2000 to January, according to data compiled by Bloomberg.

“The route we want to take is reliant on not making the mistake that many other groups have made in that space,” said Philips, 46. “The link between economic growth and equity returns is just not a good one. On top of it you are getting too many people in a crowded space.”

Courting Pensions

Northwest expanded assets by 37 percent in 2010 as pension and endowments concentrated their hedge fund investments in a smaller group of established and larger houses in the wake of the global financial crisis, said Mark Smith, Northwest’s head of business development.

About 75 percent of Northwest’s assets now come from such institutions, he added. Funds of funds, which farm out money to different hedge funds, contributed about 70 percent of Northwest’s capital in 2007, Smith said in May.

The new fund may appeal to pension funds which already have large amounts of money invested in equity funds that don’t short and want to limit the market risks of additional equity investments, Smith said. Shorting involves selling borrowed stocks with the view they can be bought back cheaper.

Northwest already has two multi-strategy market-neutral funds that trade shares, convertible bonds, warrants and options. A third fund, which invests in warrants, bets on market direction.

The new fund will use fundamental analyses to pick no more than 15 stocks in each of its major markets: Hong Kong, China, Japan, Taiwan and India, Philips said.

“Per market, people have 30, 40, 50 positions,” Philips said. “Once you start going above that number, you do become the market.”

Stock Picking

Northwest in April hired Nial Gooding, most recently a Hong Kong-based executive director of equity sales at UBS AG focused on Greater China, to strengthen its stock-picking ability, Philips said. Gooding, 51, also worked for Chase Manhattan Bank, Barclays Plc and CLSA Asia-Pacific Markets.

The Northwest Equity Alpha Fund will target an annual return of at least 20 percent, Philips said. As part of the strategies of the two existing market-neutral funds, it returned 30 percent between April 14, 2010, and Feb. 7, said Philips.

The new fund will limit borrowing to no more than 50 percent of its assets, Smith said. It will use index futures to hedge risks, Philips added.

Philips and Rogers met trading baskets of Japanese warrants and convertible bonds for Cresvale International.

The $369 million Northwest Fund Ltd. and the $300 million Northwest China Opportunities Fund Ltd., the two market-neutral funds, each returned about 7 percent in 2010. The $18 million Northwest Warrant Fund Ltd. gained 61 percent in 2010.

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