Kelusa Capital China, a Singapore-based hedge fund firm, plans to increase assets almost five times to $250 million after its fund outperformed the nation’s stocks.
Kelusa Capital China, which focuses on the world’s second-largest economy and has assets of about $55 million, gained more than 7 percent this year through September, said Kenton Leo, the founding partner of the fund.
The MSCI China, which mostly tracks Hong Kong-traded shares of Chinese companies, slumped more than 26 percent during the period, while Asia-focused hedge funds lost about 7 percent, according to Singapore-based Eurekahedge Pte. The government is wrestling with elevated inflation and the threat of a deeper economic slowdown because of the debt crisis in Europe.
“Panic creates opportunities,” Leo said. “The list of stocks that I have today that are at all-time low valuations is growing daily as we speak because things are getting sold down indiscriminately.”
The fund, which expects to have positive returns in rising and falling markets, will initially focus on preserving capital and subsequently invest when the market panic subsides over the next 18 to 24 months, Leo said. The fund, which holds about 60 percent in cash, fell 1.7 percent in September, while the MSCI China gauge slumped 17 percent, he said.
Robert McCreary, the founder of New York-based Kelusa Capital Group, is an adviser to Kelusa Capital China. From 1991 to 1995, he focused on Asian investments at Tiger Management LLC. McCreary was previously a founding partner of Banyan Fund Management, which he closed in 2004 before setting up Kelusa Capital. Leo worked at Banyan and Kelusa Capital.
Kelusa Capital Group is one of the so-called Tiger Cubs, a group of hedge-fund managers either backed by Julian Robertson or who worked at Tiger Management, which he founded in 1980 and built into one of the world’s largest hedge funds before returning clients’ money in 2000.
Kelusa Capital China, which started investing in August 2009, is seeking to raise capital from investors wanting low-volatility returns regardless of how the market performs, said Leo, who also oversees Kelusa Capital Master Fund’s investments in Chinese stocks. The correlation of the fund to the market is negative 1 percent, Leo said.
“We’re very focused on thinking about picking companies that will underperform and outperform the market, and constructing a portfolio where company fundamentals drive the fund performance, rather than big macro events” Leo said. “Japanese earthquakes or events in Europe don’t cause big swings in our performance.”
Tough Raising Funds
Hedge funds have found it tough to raise capital as investors shifted to experienced managers or established firms with steady returns and staff dedicated to risk assessment after the collapse of Lehman Brothers Holdings Inc. in 2008 led many funds to freeze assets. Firms managing more than $500 million received almost 62 percent of the capital invested in Asia-focused hedge funds in the second quarter, according to Chicago-based Hedge Fund Research Inc.
“My impressions from my recent interaction with China-based managers and regional managers is the capital raising environment is very tough short term,” said Simon Hopkins, chief executive officer of Singapore-based Milltrust International Group, which helps hedge funds focusing on emerging markets set up managed accounts for institutions. “The China-based managers haven’t raised assets and the Hong Kong and regional managers are also finding the current environment very challenging.”
Kelusa Capital China is betting on a decline in stocks linked to Chinese luxury consumption “that are in for some pretty big downgrades,” Leo said.
Government curbs on lending and the real-estate industry to damp inflation are slowing demand in China. A slump in global investor confidence and heightened risks of recession in the U.S. and euro area economies are weighing on the outlook for exports.
The fund is looking to buy shares in companies that are at all-time low valuations such as container shipping firms, ports and exporters, Leo said.
“These companies are being hurt by a slowdown in China exports, but borderline bankruptcy is being put into these valuations,” Leo said. “There will be an impact, but this entire sector is not going to go bankrupt.”