Kenneth Hung is the fund manager for the Trophy Fund, a long/short
equities pan-Asian hedge fund. The fund returned almost 300%
in 2003 and has posted an annualised return of 57% since inception
in September 2001. They currently have US$8 million in the
Trophy Fund and US$10 million in a separate managed account.
Interview with Kenneth Hung
- Can you first give us a brief outline on the key individuals
at Winnington Capital?
We have five people. I make most of the decisions. I
have two assistants, one with an accounting background
who does research and analysis of companies; the other
is a computer programmer who filters and screens companies
- So, need I ask how 2003 was for you? What do you attribute
the success to?
2003 was a good year for us; our investment formula was
proven right. I think we can categorise the profits we
made in largely four areas. The first was in a position
of a small company we bought in mid-2002. It initially
went down but we were very confident of its prospects
that when it started to go up again, we increased our
exposure. Eventually we made 10x our money over 18 months.
The second trade was Petrochina, a stock that we knew
well and traded previously. When Warren Buffet took a
stake in it, we took a large exposure and made decent
money in the following four months. The third area was
when we cashed out of most of our exposure in the Chinese
market during the mini-euphoria in that market in late
November and December and as a result the fund was up
40% in December. We also made money trading the precious
metals during the year.
Our success is due to our ability to identify undervalued
companies for the long term; and our "feel"
for the markets that provide us with short/medium-term
opportunities. With long-term investments, we follow them
closely and determine the optimal timing for exits without
becoming sentimental. Short/medium-term trades require
different techniques, which are a combination of screening,
market instincts, timing and stop-loss controls.
Which markets did you find the best returns in 2003?
The best returns usually happened in areas where one
is most comfortable in at that moment in time. In 2003
it happened to be in Hong Kong.
- Due to the strong Asian markets in 2003 most long/short
funds had a high beta correlation to the markets. Did this
apply in the case of the Trophy Fund and what was your average
net and gross exposure for the year?
I don't think we had a particularly high beta correlation,
because some of our trades did not correlate to the markets.
We do not like high borrowings. In 2003, our average gross
exposure was 97% of NAV and net was around 80%.
- Despite the excellent returns over the past year do
you find investors put off by an annualised volatility greater
Perhaps they would have less of a concern if they understood
how that volatility came about. A lot of the volatility
was due to drawdowns on the profits we made. For instance,
on the small company I mentioned earlier, we bought the
stock at $0.26. When it first went up to $0.80, we did
not sell any shares (because the best news was yet to
come). It then corrected to $0.50, which was a sizeable
drawdown and volatility. We eventually sold most stocks
six months later between $1.30 - $1.50.
You claim that your research is mainly proprietary
internal filters and models, company visits, as well as
external. Can you explain in more detail and how many
company site visits do you perform annually?
We do about 30-40 company visits and presentations each
year. The companies we are keen on, we usually get to
a level where we have direct contact with the management.
In some cases, we would try to help them with M&A,
strategies, directions and PR; so they like us as well.
- Do you employ automatic stop-losses and if so what
are they? What other risk management measures do you implement
to avoid large drawdowns?
We are more disciplined with stop-losses on our short-term
trades. On the longer-term trades, we would evaluate the
situation, and if the fundamentals are still intact then
it could be a good opportunity to increase the exposure,
but I do not have the ego to double up for the sake of
it. When we are unsure of something, we usually get out
or halve our position(s); so when we trade well, we increase
our exposure, and when we trade badly, we decrease.
- What are the main pitfalls in trading Asian markets?
Any short selling frustrations and obstacles?
There are certain pitfalls like the inability to short
in certain markets or stocks, but they do not bother me
too much. The markets provide me with enough volatility,
and I like volatilities. Even though I have a derivative
background I do not sell volatility.
Can you give a brief background of yourself and your
I started my career in London with the stockbroker, Sheppard
& Chase, in 1983. I was fortunate enough to have started
out in research under the late Piers Hughes, who I consider
to have one of the best brains in the City at the time.
Then I moved into fund management. I won the annual staff
stock tip competition two years in running (out of some
80 analysts, salesmen, and fund managers) in 1984 and 1985;
I decided it would be unwise to participate in 1986!
I was then promoted to the parent bank, BAII, to set
up the capital markets operation in Hong Kong, trading
Japanese warrants and convertibles. After two years, I
went to work for a prominent family on direct investments
in China. At the time, direct investments were very good
experience, but it was 10x the effort and 1/10 the returns.
So I joined Peregrine Equity Derivatives in 1996, and
was responsible for marketing derivatives, including the
best performing covered warrant in Hong Kong in 1996 (out
of some 500 warrants issued in the market), which went
up more than 5x.
When Peregrine went under (due to the bond department),
our team was headhunted to join Commerzbank. After a year
they wanted to transfer us to London or Tokyo. That's
when I decided to go on my own, and started to trade under
Winnington Capital. Between 6/1999 and 3/2001, we made
audited annualised returns of 290% for clients. In 9/2001
we set up The Trophy Fund.
Trophy Fund was initially underwater?
Trading on my own under Winnington Capital was very straightforward.
Setting up a hedge fund initially was quite different.
It required multi-faceted skills; one has to deal with
regulatory and legal issues, recruitment, systems, managing
a business; and then finding time to trade.
With Trophy Fund, because I wanted to set it up properly,
I started with nine people. We did have more than our
fair share of the start-up teething problems. Our launch
coincided with 9/11, the money that was promised did not
come in and there were a few staff that had big egos,
so I had to downsize the whole thing after 12 months and
focus on core competence. I would strongly recommend anyone
thinking of setting up a hedge fund to have enough funds
in the bag, so as not to worry about fund raising. They
should prioritise on building a good track record.
How do you consider yourself different from others?
Because of my varied background in trading (where I used
to write 15-20 tickets in a day) and direct investments
(profitability could take up to 3-4 years), I am comfortable
to trade short term or take long-term view. I have developed
a discipline to run winners. My training has always been
on stock picking and finding profitable investments for
clients, "if the clients make money, we'll make money",
hence it became relatively easy for me to trade for a living.
And lastly what is your capacity and how are you intending
to attract investors in 2004?
Trophy Fund is an Asian-biased global fund, so we probably
would not need to review our capacity until, say US$1 billion.
We had not done any marketing for 2.5 years until this month
when an investor invited us to participate in conferences
in Geneva and Zurich. Attracting investors is important,
but it's equally important to have long-term investors.
I think it's vital for potential clients to get to know
us; how we make money and how we lose money.
Most funds aim to have low volatility; their returns
should be between the range of 10% and 12% per annum.
We target between 50% and 60%, for some months we could
have 10% drawdowns. It's very easy for someone to say
we are too volatile, but volatility can also be good.
Anyone who had 5% of their assets in Trophy Fund in 2003
would have lifted their overall performance by 15%.
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