Founded in 1999, Pinpoint is an Asia-based investment management firm that serves institutional investors, pension funds, private banks, fund of funds, family offices and high net worth individuals. Pinpoint Asset Management Limited was incorporated in Hong Kong on 4 Jun 2010 and regulated by the Hong Kong Securities Futures Commission for Type 9 (asset management) activities.
Pinpoint manages two Cayman-based hedge funds, the Pinpoint China Fund and Pinpoint Multi-Strategy Fund as well as three domestic hedge funds in China. As of 28 February 2017, the firm’s total assets under management (AUM) is US$1.45 billion. The AUM of the Pinpoint China Fund and Pinpoint Multi-Strategy Fund are US$782 million and $348 million respectively.
- Please share with our readers a bit of background about the fund and its key personnel. What were some of the factors that lead you to launch the Pinpoint China Fund in 2005?
The firm’s key person is Wang Qiang, who is the Chairman and Chief Investment Officer of Pinpoint group, with over 20 years of investment management experience. Prior to founding Pinpoint, Wang Qiang worked at China Aerospace Investment Trust, Guo-Tai Jun-An Securities and Jilin Securities, where he was responsible for proprietary trading, asset management and investment consulting. Wang Qiang graduated in 1989 with a degree in Engineering from Shanghai University in China.
Pinpoint began its asset management business in 1999 by running managed accounts that invest in the China equities market. As the accounts grew, we received a lot of investor demand and interest for an equity long/short China strategy. This was the key reason the firm launched the Pinpoint China Fund in 2005.
- The Pinpoint China Fund returned 2.76% in 2016, outperforming Greater China (-4.75%) and Asia ex-Japan (-0.83%) equity long/short peers. What are some of the key factors in your investment philosophy which differentiate you from your peers?
The Pinpoint China Fund invests in six different sectors/areas – Consumer, Financials, Healthcare, Manufacturing, TMT, and Arbitrage. We firmly believe that the Pinpoint China Fund is a true hedge fund and one of our key differentiators is our risk management framework. The fund has risk limits at the portfolio level as well as for each sector. Each sector maintains a low net exposure and is well hedged.
Many of our peers (who also run hedged investments) have high net exposures in their portfolios to either the markets or individual sectors in their portfolios. They tend to be exposed to high market or sector beta risks. Conversely, we prefer to hedge our risks within a sector. For example, when we have sizable long positions in a sector, we also find short trades within the same sector. Therefore, we are less reliant on the overall market or even sector performance to generate the fund’s returns.
In 2016, many of our peers took a more directional or sector heavy investment strategy. Given the steep fall in the Hong Kong equities market during the initial two months of 2016, many of our peers were unable to recoup the losses over the rest of the year.
- Pinpoint Asset Management Ltd launched the Pinpoint Multi-Strategy in March 2008, right before the global financial crisis turmoil. The fund declined 2.42% (March 2008 to December 2008), compared to the Eurekahedge Multi-Strategy Hedge Fund Index (-10.14%) and the Eurekahedge Hedge Fund Index (-10.24%) over the same period. Could you share with us your experience navigating through the markets during the crisis?
The Pinpoint Multi-Strategy Fund runs diversified strategies and may invest in various alternative investment strategies including equities, event driven, convertibles, macro, credit, managed futures, fixed income and rates. Managed under our tight risk management framework, the fund seeks to generate strong risk-adjusted returns by managing volatility well. For example, the fund’s volatility for 2016 was around 3%.
In 2008, the Pinpoint Multi-Strategy Fund’s performance was driven by our commodities trades, equity short trades and maintaining a lower net equity exposure of 10% to 20% during that period.
- What sort of a selection/filtration process does a stock go through before you invest in it? What kind of research do you put into selecting stocks, and sectors at large?
We adopt a fundamental and bottom-up stock selection process. However, the key area that differentiates us from our peers is the high degree of prudence we take when performing due diligence checks on the company. For example, we spend a lot of time and resources in channel checks. We even cross-check information on the company with its competitors. Our local sector specialist team has built extensive networks on the ground. We are also a big adopter of new technology and leverage it in our research to create an edge and help us generate alpha.
- Your investment philosophy cites ‘Alpha, not Beta’, with 85% of your trades being bottom-up driven. How do you determine that your investment execution stays close to your philosophy?
Our investment philosophy of ‘alpha, not beta’ stems from the fact that since 2012, it has become more difficult for an investor to make money simply by holding a long-biased exposure to China’s market. China’s economy used to grow at double digit percentage points but it is no longer growing at that rate. In recent years, we find some sectors of the economy having flat or even negative growth rates. Consequently, we believe that the way to generate alpha is to be specialized. Thus, every investment team member at Pinpoint is a specialist in his/her own sector or strategy.
To ensure that our investment execution stays close to our philosophy, the firm’s strict risk management framework restricts us from taking “bets on beta”. Under the framework, net exposure to each market and sector has to be kept low.
- Please share with us the asset class concentrations of your multi-strategy fund, and to what extent you plan on diversifying it – in terms of number of stocks as well as across sectors.
Pinpoint’s philosophy on this is question is that alpha generation is more about attracting and retaining the right talent, rather than diversifying the asset classes of the Multi-Strategy Fund for the sake of it. While we will continue to diversify the fund across asset classes and equity sectors, finding the right talent is crucial.
- Would you be using leverage for your portfolio? If so, to what extent? What would the usual ratio of long to short positions in your portfolio be?
- You mentioned a ‘strong downside protection mentality’ as part of your investment strategy. Please share with us some of your risk management tools and practices which you have implemented to safeguard your portfolio?
- What are some of the key trends that you foresee for the Chinese economy which you feel will drive an uptrend in domestic equity valuations?
- A US-China trade and political divide is emerging and Asia Pacific economies are deliberating on choosing their ‘sides’. With this in mind, what are your expectations of the Chinese economy going into 2017? Do you expect to see a pick-up in economic activity within Asia Pacific and how are you preparing your portfolio for these expectations?
We use leverage in both the Pinpoint China Fund and Pinpoint Multi-Strategy Fund.
Pinpoint China Fund
Pinpoint Multi-Strategy Fund
Typical amount of leverage
130 - 150%
Typical ratio of long to short positions
For the Pinpoint Multi-Strategy Fund, some of the key risk metrics monitored on a sub-portfolio (for each sector or strategy) level include the maximum drawdown, liquidity control, net and gross exposure limits, single holding limits and single market net exposure limits. This ensures that the overall portfolio has low volatility, low drawdown and low net exposure. If the drawdown limits are breached, our risk management team would look to reduce capital or cut positions within the sub-portfolio.
Some of the structural reforms being implemented in mainland China may improve equity valuations in the long term. In the shorter term, we are more constructive on the Hong Kong H-share market for several reasons. Many long-only mutual funds that are benchmarked to global equity indices are still underweight the H-share market. Our view is that China’s economic data for Q1 and Q2 will likely be positive and the RMB will continue to depreciate over the next three to five years. These are some of the key trends that will boost equity valuations in Hong Kong.
We expect 2017 economic data from China to be positive for Q1 and Q2. For Q3, the data is likely to remain positive, but we are less certain about Q4 data. We expect markets such as India, Pakistan, Vietnam and Cambodia to produce good economic activity. Given the geographical scope of investments, the Pinpoint Multi-Strategy Fund would look to capture some of these regional opportunities, while the Pinpoint China Fund is focused on Greater China opportunities.