with Sunny Xuan Li of Pinpoint Asset
Pinpoint Asset Management manages the China-dedicated
Pinpoint China Fund. The fund was launched
in June last year and currently has around
US$40 million under management. The total
return since inception was 45% net till
the end of March 2006.
The Pinpoint China Fund has had
a robust run since its inception in June
2005, with annualised returns of 32% for
2005 and year-to-March returns of 23%
for 2006. Given the limited coverage of
brokerage firms in China, does your fund
tend to be long-biased? What would you
estimate to be the alpha component of
Yes, our fund is long-biased due to
1) the relative low valuation of China
domestic stocks, and 2) no shorting
is allowed in the domestic market. We
can only short in overseas China stocks,
such as those listed in Hong Kong. By
the way, 50% of our fund is invested
in China domestic A-share market through
I would expect alpha component to be
around 40-50% of said returns.
What are the typical holding
period and turnover of your equity long/short
Our average holding period is around
six months. Actually, some core holdings
have been in our fund since the day
the fund was set up. Typical turnover
is around 200-300% annualised in core
On a related note, in terms of
opportunities for hedge funds in the
region, is there not a trade-off between
market inefficiencies and improved corporate
governance? Do you expect deepening
markets to have an adverse impact on
your fund's performance down the road?
Yes, there is definitely some trade-off
between market efficiencies and corporate
governance. But the China market, especially
the domestic market, having just come
out of a bear market last year, is still
a long way to a more efficient market.
Opportunities in this market are abundant.
What are some of the main risks
currently associated with investing
in the region? Could you briefly discuss
how your risk management system addresses
i) Sudden economic slowdown of the
China or US market or trade disputes
among major global economies.
ii) Regional political uncertainties,
such as conflicts among local nations.
The recent Korea-Japan dispute over
islands is a typical example.
iii) Currency fluctuation.
Our risk management system is focused
on reducing the overall risks of our
portfolios, including those risks mentioned
We try to limit our sector and individual
stock exposure, especially those so-called
hot sectors such as the commodity sector.
Almost all of our holdings have very
liquid trading volume, which will reduce
our liquidity risk.
We also constantly monitor our holdings
and watch closely on sector news to
adjust our risk exposure.
China-investing hedge funds have
really taken off since the market-correction
witnessed last October, as indicated by
the performance of the Eurekahedge Greater
China Hedge Fund Index (up 7% in the second
half of 2005, and 17% in the fist quarter
of 2006). What do you see as the main
drivers for this bullish trend?
China is a big economy and has a much
diversified spectrum of sectors. More
and more funds realise that and want
to ride on the first mover's advantage.
Also, China has a very unique business
culture; as such you can see that most
newly set-up funds are run by locals.
Recent Eurekahedge research shows
a trend of growth in single-country
focused hedge funds in emerging Asia,
particularly China. In 2005 alone, 15
new funds with a China focus were launched,
operating alongside the 28 funds as
at end 2004. How does your fund maintain
an edge in this environment of heightening
Our fund style is bottom-up, fundamental-driven.
The consensus among the team is to deliver
good and satisfactory returns to our
investors while building a solid platform
for those interested in China. We think
investment is a life-long learning process
and we are always learning from the
market and our friends in the market.
From a hedge fund's perspective,
how does the investment environment
in China compare to that in other well-performing
regions in emerging Asia, such as India
Since the stock market reform last
summer, China has seen great improvement
in the investment culture. Institutional
investors have gradually become the
dominant players in the market, which
is good to the market and its participants.
The Chinese government is determined
to bring back the capital market in
So far, the China market has not been
perceived as well as other Asian markets
in general. But the stock market reform
last summer has provided the catalyst
and growing interest can be seen in
China's domestic market. The investment
environment has changed very fast ever
Finally, could you share with
us your short-term outlook for Chinese
Hong Kong market may see volatility
in the short term due to the strong
rally year to date. But the domestic
A-share market has just started to experience
the bull run.