As Hedge Funds Reel, One Hong Kong Firm Is Thrivingby
Fuchs's BFAM Asia fund has climbed for nine straight months
Winning trades include the Chinese yuan and Kaisa bonds
In a hedge fund industry plagued by lackluster performance and the biggest outflows since 2009, Benjamin Fuchs stands out.
From his office next door to hawkers of pigs’ feet and live chickens in Hong Kong, the founder of BFAM Partners has steered his $1.8 billion Asia fund to nine straight months of positive returns and boosted assets under management by $650 million since July 1. While hedge fund titans from Daniel Loeb to Steven A. Cohen lament crowded bets and a lack of talent, Fuchs has thrived with a contrarian approach that often puts him on the right side of his peers’ losing trades.
When hedge funds piled into short-term wagers against the yuan after China’s August devaluation, for example, Fuchs correctly bet they were too pessimistic. He bought the beaten-down bonds of developer Kaisa Group Holdings Ltd. last year before prices doubled, and has used derivatives to profit from excessive fear in global stock markets. One of his latest trades -- selling credit default swaps on embattled commodities firm Noble Group Ltd. -- hinges on a call that investors are overly bearish.
“What might look like a large loss for initial investors, depending on where your entry price is, can be a huge home run,” Fuchs, a former proprietary trader at Lehman Brothers Holdings Inc. and Nomura Holdings Inc. who founded BFAM in 2012, said in an interview.
At a time of increasing public skepticism toward hedge funds, BFAM’s success is a reminder that some managers are still finding ways to make money and lure new investors. The firm’s Asian Opportunities Master Fund has returned 5.9 percent this year through April, adding to last year’s 11 percent gain and bringing its annualized return since inception to 16.7 percent, according to a person with knowledge of the matter. Fuchs, 46, declined to comment on returns because the fund is private.
"His performance stands out for sure,” said Anthony Lawler, a money manager at GAM Holding AG in London. “In some ways, he looks like the ‘old style’ multi-strategy stars in that he is not trading super complex structures, but rather seems to be finding solid idiosyncratic opportunities.”
Investment pools tracked by Hedge Fund Research globally edged up 0.3 percent in the first four months this year after a 1.1 percent retreat in 2015. At least 979 funds shut their doors last year, while the industry had $16.6 billion of net outflows over the past two quarters, according to HFR. BFAM generated an annualized return about three times the 5.3 percent industry average gain since 2012, according to Singapore-based data provider Eurekahedge Pte.
Fuchs and his team of 19 have found some of their best ideas in China. After the August yuan devaluation spurred bearish speculators to bid up prices of three- and six-month forwards, BFAM sold those contracts while buying cheaper 12-month forwards, a trade that profited as prices converged. The Chinese currency has recovered 1.2 percent against the dollar since hitting a five-year low in January.
BFAM started buying Kaisa debt in January last year, Fuchs said, a period when the Chinese firm’s 2018 notes traded as low as 26 cents on the dollar. While Kaisa defaulted in April 2015, the bonds have since rallied to about 79 cents. BFAM is part of a dissenting group of Kaisa offshore creditors pushing for better restructuring terms for debt holders.
“We’re looking for situations where the bonds have already priced in an extreme scenario,” said Fuchs, who also purchased other single-B rated Chinese property debt last year and is letting the trade wind down as bonds mature or get bought back by the issuers. He said the notes were trading at an average yield of about 10 percent last June, pricing in losses four times those during the 2008 global financial crisis.
In the stock market, Fuchs has made money from what he saw as a disconnect between the prices of short-dated equity options and longer-term contracts. He’s sold the former to capitalize on investor angst about an imminent sell-off, while buying options with further out expiry dates because values have been suppressed by private banks that sold structured products to individual investors.
Of course, not all of BFAM’s trades have been home runs. Yuan option positions tied to a view that the economic outlook wasn’t as bad as investors believed lost money during the August devaluation. BFAM also invested in a Chinese solar company that recently filed for bankruptcy, Fuchs said, without identifying the firm.
The Chico, California native, who graduated from the University of California-Berkeley, moved to Asia at the age of 21, teaching English and working as a waiter at a karaoke bar in Japan. A chance encounter on a high-speed train led to a job trading futures and options for the now defunct Barings Bank in 1992, jump-starting his career in finance.
From his current office in Hong Kong’s Tin Hau neighborhood, which abuts one of the city’s rough-and-tumble food markets and sits outside traditional hedge-fund haunts in the Central business district, Fuchs is still finding opportunities to go against the grain.
He began selling Noble six- to 18-month CDS contracts in February, when investors were nervous about the commodity trader’s ability to roll over short-term debt. The trade allows BFAM to collect periodic payments in exchange for a promise to pay bondholders in the event of a default. While Noble’s debt tumbled last year as the company battled a rout in commodities and fended off attacks on the integrity of its accounting, the notes have rebounded in 2016 as raw materials rallied.
For Fuchs, the turnaround is a logical result of what drew him to the trade in the first place: “The market was too fearful, both overly negative on commodity prices and overly bearish on them as a business.”