Former Mizuho Trader’s China Bet Gives Hedge Fund 19% April Gain

A hedge fund led by Mizuho Financial Group Inc.’s former Asian fixed-income trading head returned an estimated 19 percent in April, helped by China trades.

Ark Asia Access Master Fund’s record monthly gain took this year’s performance to 29 percent, said Chief Investment Officer Jeffrey Yap. His Hong Kong-based firm Ark One, which started trading in June, manages more than $25 million of assets, investing in public and private credit with a focus on China.

Yap made money betting investors would demand smaller excess returns to hold Chinese credit in a month when the nation’s central bank cut its reserve ratio by 1 percentage point, the most aggressive since the global financial crisis. That and other reforms helped soothe the market after Kaisa Group Holdings Ltd. became the country’s first property developer to default on dollar debt and a state-owned company became the first to default on domestic debt.

“We have been anticipating a string of Chinese policies which would reduce its risk premium against global markets,” Yap said. “As a result, Chinese credits as well as equities were seen catching up to global valuation.”

Chinese policy makers are juggling trying to prop up an economy whose annual growth is the slowest since 1990 and curbing government, corporate and household debt that had risen to 282 percent of total annual economic output by mid-2014, according to McKinsey & Co.

Risk Premium

The excess returns that investors demand to hold Chinese credit instruments have narrowed against global peers of the same rating since some reforms were introduced in March and Yap expects the spread to shrink further.

In recent months, policy makers have lowered the minimum credit rating of overseas debt that insurers can invest in and allowed social security funds to buy local government debt.

Measures like these help reduce the risk premium for Chinese credit and spur stocks to rally by channeling long-term capital into the market, reducing borrowers’ reliance on banks and shadow banking, Yap said.

In particular, Yap bet on Chinese credit and against Indian debt, which has been trading at a smaller risk premium because of enthusiasm about Indian Prime Minister Narendra Modi’s government and spillover effect of European easing measures.

“We believe the market is positioned too bullish on India and too bearish on China,” said Yap. “On India, we identify a potential credit and property bubble, which is less publicized and understood by the market.”

Another profitable trade was buying offshore yuan debt of Chinese companies against dollar bonds, as loosening of monetary policy in the world’s second-largest economy helped drive yields lower, he said.

Ark One is buying stocks of Chinese property and consumer companies while selling their bonds because their shares have not priced in strong growth and have lagged the credit rally, Yap said. Chinese policies to allow developers to sell domestic bonds and pursue mergers and acquisitions with the financial support of insurers and funds will support property stocks, he added.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE