Former LTCM Managers Start Firm to Tap China Hedge-Fund Demand

  • Shanghai-based Sycamore has John Meriwether as an investor
  • Sycamore to help Chinese investors pick international managers

Former Long-Term Capital Management executives have started a firm that will connect Chinese investors with international hedge funds, as turmoil in the world’s second-largest equities market spurs demand for overseas assets.

John Meriwether is an early financial backer of Shanghai-based Sycamore Investment Services, said Chief Executive Officer Jeff Li, who formerly worked as a strategist at LTCM. Huang Chi-fu, who co-headed the Asia office of LTCM’s hedge fund that collapsed in 1998, is one of the founders of Sycamore and also an investor, Li said.

Sycamore is officially opening for business later this month, joining firms such as Springs Capital and Noah Holdings Ltd. in helping Chinese investors gain access to international investments as the nation makes gradual moves to open its capital account. The need to spread assets more widely has been underscored by a volatile stock market and a currency that’s falling against the dollar, with options traders betting on more declines.

“Chinese investors have growing demands for the alternative assets both within the country and in overseas markets," Li said in a telephone interview from Shanghai. "With the gradual opening of the capital market and yuan liberalization, two-way cross-border investment becomes possible."

LTCM Collapse

LTCM, which assembled a team of top Salomon Brothers Inc. traders and Nobel laureates and led by Meriwether, roiled global markets in 1998 after losing more than 90 percent of its $4.8 billion of assets in the weeks following Russia’s currency devaluation and bond default. The Federal Reserve orchestrated a $3.6 billion bailout by the fund’s 14 banks to calm fears that the firm’s lenders and trading partners would be dragged down.

Meriwether, 68, who had been credited with generating billions of dollars of revenue for Salomon Brothers in the 1980s, went on to found two more hedge-fund firms. Huang teamed up with another LTCM partner and Nobel laureate Myron Scholes for hedge-fund firm Platinum Grove Asset Management. Meriwether and Huang have since retired as hedge-fund managers, Li said.

Limited Access

Sycamore and other firms are offering Chinese investors access to international investments amid a tumultuous time for hedge funds globally, as volatile markets have hurt returns for even the best-known managers. Springs Capital, with offices in Beijing, Hong Kong and Shenzhen, last year hired a four-member team in Singapore from Hermes Investment Management to help find international investments for Chinese companies and wealthy individuals. Noah Holdings, a Shanghai-headquartered wealth manager, is boosting its Hong Kong staff as more rich Chinese look to deploy money internationally. 

Chinese investors wanting to put money overseas have been hamstrung by their inexperience at picking managers and limited access to funds, said Li. Sycamore will help Chinese investors analyze and select international alternative-asset managers, as well as perform post-investment monitoring, he added.

China has been expanding a program started in 2013, allowing foreign hedge fund and real estate fund managers to raise yuan capital for international investments, one of the few ways for wealthy Chinese to directly allocate money to them. Hedge funds have also been tapping Chinese investors who have assets outside the country.

Scouting For Opportunities

Sycamore will provide similar services to international investors scouting for opportunities among yuan-denominated funds set up in China. Top ten performers among the more than 2,000 stock hedge funds based in the nation returned an average 70 percent between June and August, when the benchmark Shanghai Composite Index slumped as much as 43 percent. About 65 of them gained more than 100 percent in the past year, according to data posted on the website of Howbuy Investment Management, which tracks fund data.

Investing in China-domiciled hedge funds does come with some risks. Following the CSI 300 Index’s plunge last week, which included two abbreviated sessions where stocks plunged by more than 7 percent, many China hedge funds are facing forced liquidations. Hedge funds in China generally have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value.

Sycamore Founders

Sycamore was founded by Li, Huang and Liang Bing, according to Li, who was most recently managing director of the Shanghai unit of Citco Group Ltd., a provider of administration services for alternative-asset managers. Liang teaches finance at the University of Massachusetts at Amherst. His expertise on hedge-fund performance, risks and strategies has been tapped by the U.S. Securities and Exchange Commission and lawmakers, Li added.

Sycamore will also handle middle-office services such as trade confirmation and plans to provide independent valuation services for over-the-counter derivatives and asset-backed securities in China, according to Li. The company is looking for a strategic investor and is in talks to bring in a U.S. university endowment official as an independent director, with a U.S. office under consideration, Li said.

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