Stratton Street Capital LLP, a U.K. manager with $1.6 billion in assets, is seeking to raise money from Asian investors with a yuan bond hedge fund that has returned 23 percent this year.
Its $215 million Renminbi Bond Fund, which invests in dollar-denominated investment-grade bonds and uses non-deliverable currency forwards to hedge investments into the Chinese currency, has returned 86 percent since inception in November 2007, said managing partner Andrew Main. The London-based manager doubled the fund’s assets from $96 million at the end of 2011 and expects to grow similarly over a year, he said.
Stratton Street is among managers tapping appetite in Asia by offering strategies other than equity-focused ones that dominate in the region. Demand for higher-yielding assets such as bonds is rising as central banks in the U.S. and Japan use near-zero benchmark interest rates to sustain economic growth.
“We are beginning to raise our profile in Asia,” Main said in an interview in Singapore yesterday. “We’re seeing a lot of interest at the moment. We’re the only renminbi fund with a five-year track record with positive returns every year and we have demonstrated outperformance against other funds in Asia.”
The majority of the fund’s investors, including private banks and family offices, are from Europe, while Asian investors account for about 10 percent, Main said.
Stratton Street’s fund return compares with the 4.5 percent gain this year through October by the Eurekahedge Asian Hedge Fund Index. Yuan bond funds produced an average 6.1 percent return this year, according to data compiled by Bloomberg based on the performance of 253 onshore vehicles.
Equity-focused hedge funds accounted for 77 percent of investment strategies in Asia in the third quarter, compared with 46 percent globally, according to Chicago-based researcher Hedge Fund Research Inc.
Stratton Street scores countries’ net foreign assets, or the difference between a nation’s value of assets abroad and its debt to foreigners, Main said. The manager excludes countries with negative net foreign assets of more than 50 percent.
Among the biggest contributors to the fund’s performance this year were investments in the Middle East, such as Qatar and Abu Dhabi, amid renewed interests from investors for nations with strong balance sheets, Main said.
“Unlike others, we don’t think the world is going to change very much next year,” he said. “Our view of the world is that we’re still deleveraging and because we’re deleveraging we don’t want to be in weak credits.”
To control investment risks, the assets in Stratton Street’s portfolio now have an average rating of A- from BBB in the past three to six months, Main said.
Stratton Street expects demand for the Chinese currency will increase as economic growth rebounds. The world’s second-largest economy is showing signs of improvement following a seven-quarter slowdown. Gross domestic product will increase 7.7 percent from a year earlier this quarter after climbing 7.4 percent in the three months ended September, according to the median estimate in a Bloomberg survey.
The yuan rose to a 19-year high of 6.2223 per dollar yesterday. It fell 0.08 percent today as the lowering of the central bank’s reference rate meant the currency had to weaken to remain within its permitted trading range.
“There are concerns that China’s economy may slow as we approach year-end,” according to Stratton Street’s October newsletter to investors. “However, with further easing measures on the agenda as well as stepping up of investment projects and infrastructure spending, we feel China is still heading for a soft landing as the country finds a compromise between keeping inflation low and increasing growth.”