Ex-Deutsche Bank Prop Trader’s Hedge Fund Returns 20%
Nine Masts Investment Fund, led by the former Asia head of Deutsche Bank AG’s Saba proprietary trading desk, returned an estimated 20 percent in its first eight months, according to a newsletter sent to investors.
The Asia-focused relative-value capital structure hedge fund run by Hong Kong-based Nine Masts Capital Ltd. grew assets to more than $120 million, said three people with knowledge of the fund. It started trading in May with $30 million of money from its partners, their friends and families, the people said on condition of anonymity because the information is private.
Investment opportunities in Asia for the strategy that seeks to make money from pricing gaps of securities sold by the same company have expanded with the growing rank of corporations selling bonds to take advantage of low interest rates after the financial crisis. More listed companies also traded their shares or depositary receipts on a secondary exchange in the region.
“Often markets are restricted in terms of access so arbitrage opportunities can stay open for longer than you would think,” said Paul Smith, chief executive officer of Hong Kong- based asset manager and hedge fund distributor Triple A Partners Ltd. “There are often big discrepancies all around the region on these types of structures. It makes our region very attractive for this type of strategy.”
Nine Masts, led by Chief Investment Officer Wang Bing, also profited from the dearth of hedge funds employing the strategy, the people said. Elaine Davis, Nine Masts’ chief operating officer, declined to comment.
Relative-value hedge funds accounted for less than 16 percent of the assets of Asia-focused hedge funds by September, against the 25 percent global average, according to data from Chicago-based Hedge Fund Research Inc.
The Eurekahedge Asia Relative-Value Hedge Fund Index, tracking six funds which don’t bet on the general direction of markets, returned an estimated 12 percent last year, trumping the 8.5 percent gain of the wider Asian Hedge Fund Index, according to Singapore-based data provider Eurekahedge Pte.
Nine Masts invests in companies with multiple securities on issue, including senior, subordinated, secured, unsecured and convertible bonds, loans, credit default swaps, common and preferred shares, equity options and depositary receipts.
Wang, 42, was a founding member of the Saba proprietary trading desk headed by Boaz Weinstein, which once managed $10 billion, in Hong Kong.
Low interest rates lured Asia-Pacific companies to sell more than $1.4 trillion of bonds since the beginning of 2009, marking the two heaviest years of issuance since Bloomberg started to track such data in 1999 and more than the previous four years combined.
Twenty companies that have gone public sold depositary receipts traded on Asian exchanges last year, according to data compiled by Bloomberg. International companies also sought secondary listings or sold shares in their local units in Asia, taking advantage of higher valuations on the region’s stock exchanges.
Prudential Plc, the U.K.’s largest insurer, started trading its shares in Hong Kong in May. American International Group Inc., Las Vegas Sands Corp. and Wynn Resorts Ltd. were among companies that took their local units public in Asia in 2010.
Companies sold 35.7 billion yuan ($5.4 billion) of Hong Kong-traded bonds denominated in the Chinese currency last year, more than the previous two years combined, according to Bloomberg data. China is encouraging greater use of yuan offshore and investors are demanding more assets in the appreciating currency.
New bank capital and liquidity rules known as Basel III are affecting the value of some existing securities issued by banks, creating further trading opportunities for capital structure funds, the people said.
Part of Nine Masts’s trades involve buying one credit product of a company and going short on another, the people said. Another portion of its investments pairs credit with equity investments, they added.
The fund also seeks to exploit the mispricing of various classes of shares issued by the same company, or its shares traded on different exchanges, as well as the mispricing of a stock of a holding company against that of an operating subsidiary, they added. It also trades profits from corporate actions and events that affect a company’s capital structure, they said.
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