with Vincent Lam, Chief Investment
Officer of Quam Asset Management
Lam has been Chief Investment Officer of
QAM since 2002. He joined the Quam Group
as a research analyst in 1999 and was promoted
to Head of Quam Research in 2001. Before
that, he was a financial journalist of two
highly circulated local publications (1996-1999)
during which he conducted interviews with
the management of numerous listed companies
and thus built up his knowledge on and network
in different industries. Vincent holds a
bachelor's degree in economics from Chinese
University of Hong Kong and is currently
reading an executive MBA.
Could you give us a brief
overview of the Chinese A, B and H share
markets, and recent positive policy changes
For the merger of A, B and H shares,
Beijing's consideration will be mainly
the stability of the mainland's financial
markets. There are still restrictions
on QFII quota because the PRC government
does not want a substantial influx of
foreign capital, which may result in
quickening the process of yuan appreciation.
But given the long-term goal of freeing
up the financial markets, the regulatory
bodies are already doing lots of work.
The first step is to allow short selling,
futures and warrant activities in the
A share market. The regulatory body
has approved the short selling of A
shares, and futures and warrants will
also be launched very soon. This is
a strong signal of further relaxation
of investment restrictions in the PRC
The next step will be the merger of
A and B shares. Since the CSRC has also
stopped approving the issuance of new
B shares, this market will gradually
die down, and it is of first priority
for the regulatory body to deal with
this market ahead of further reforms.
We therefore expect B shares to merge
with A shares in the coming 12 months.
The merger between A and H shares will
take much longer, and may not happen
before mid-2008 as this will not take
place until the yuan becomes fully convertible.
The most optimistic prediction that
the yuan will become fully convertible
is by the Beijing Olympics.
For our strategy, since QFII quote is
still very limited, we find it hard
to do arbitrage between A, B and H shares.
What we are currently doing is to buy
B shares that trade at discounts to
their A and H share equivalents in the
expectation that a potential merger
will bid up the prices of shares that
we own. Should we have enough QFII quota,
we may do long/short of the same companies
expecting the gap to narrow upon the
merger of B and H shares.
How is the emerging Greater
Chinese landscape affecting hedge funds
in the region such as Quam Greater China
Segregated Portfolio? More specifically,
how does your fund's investment process
take advantage of these opportunities?
Like any other emerging markets, the
Greater China region is vibrant, which
may mean lots of opportunities to local
experts but also certain risks to foreign
investors who do not have thorough knowledge
of the region. This is evident in the
divergent returns of the Greater China
hedge funds. We have been in the industry
for more than ten years. We have built
a solid background knowledge on over
500 listed companies in the region,
some of which we have kept good relationship
with the management for a fairly long
Our inclination to be a contrarian value
investor also helped us identify the
right investments at extremely good
prices. Given that the PRC GDP per capita
is growing at around double-digit growth
rate, we are confident that the PRC
property market is still in the middle
of a secular bull market.
The central government's austerity
measures in 2004-2005 have created a
good opportunity to bargain hunt the
PRC property developers. We believe
that this will continue to be the case
whenever there are any negative news
in the market that drive valuations
Could you also discuss
the above in the context of the returns
posted by the fund since inception?
How do you explain the sharp downturn
in the fund's May returns?
You cannot be right all the time. Since
the fund's inception in June last year,
the fund generated a net return of 49%
as at the end of September. Our target
is to achieve the maximum risk-adjusted
return. Our performance has been among
the top five out of 38 Greater China
hedge funds monitored by Eurekahedge,
with an annualised standard deviation
of below 18.5%. Given the performance
we believe that the risk our investors
are taking is more than justified.
We had substantially trimmed down our
long book in the high beta companies
since the middle of April. The market
downturn in May turned out to be a bit
larger that we had expected, but we
substantially outperformed our peers
in June mainly due to our timely action
of topping up our long position again
right at the bottom of the market in
The fund has clearly outperformed
the Eurekahedge Greater China Hedge
Fund Index (up 28% for the first nine
months of 2006), comprising of 37 China-focused
funds. What portion of this would you
attribute to Quam's investment process?
In your view, what competitive advantage
does your fund have over the other 36
We have a great team. I was born in
Mainland China with the first three
years of formal education spent in the
PRC. This background is an added advantage
over many of our competitors in terms
of understanding the PRC. I am from
an arts stream with special personal
interests in history, philosophy, psychology
and economic thoughts. This helps me
understand the qualitative side and
irrational part of investor behaviour.
Meanwhile, my other colleagues are from
science background, which helped me
formulate the quantitative approach
in the decision-making process.
What kind of situations
does your event-driven fund invest in?
What is the typical breakdown of your
strategy allocations? How dynamic are
We are basically value investors. We
tend to spot hidden jewels that may
have M&A, privatisation, recovery
or re-rating potentials. We are also
keenly looking into the upcoming opportunity
of a potential merger of A, B and H
shares which may result in unlocking
hidden values of the price differences
amongst the three markets.
In our long/short book, we also formulate
certain pair trades between closely
related companies that are currently
mispriced due to investors' lack of
appetite for holding parents. We may
initially build a small position in
an (event-driven) idea, constantly review
our positions and check if our original
ideas are still valid, and if we become
more confident we will top up our existing
positions, or vice versa.
What is the typical structure
of funds investing in the region in
terms of, say, manager location? Why?
Currently, funds investing in the region
are mainly located in Hong Kong, but
there is also an increasing trend of
new investors being based in Shanghai.
Managers choose to locate in these two
cities mainly for their proximity to
the market. Information flow is much
faster and travelling time for arranging
company visits much shorter.
It is stated in the fund
investment mandate that it has a concentrated
portfolio of 30-50 stocks. Does this portfolio
have a sectoral focus, either generally
or specific to recent market events? If
yes, what is the usual breakdown of asset
allocations by sector, and the rationale
behind the same?
That we tend to have a concentrated
portfolio does not mean that we give
up diversification. As a principle,
we normally do not invest more than
30% of our fund's portfolio in a single
sector. In mid-October, our top five
sectors are transportation and infrastructure
(23%), banking and finance (18%), property
and construction (18%), industrial manufacturing
(17%), and telecom and technology (17%).
This essentially shows our sector preference.
What practices does the
fund have in place to manage risk?
For our long book, first we have a
preference towards value stocks trading
at a huge discount to their NAVs while
paying excellent dividends. In the event
that share price does not perform, we
still have lucrative dividend income
to sustain the fund's performance. Second,
we have a 10% limit on any single position.
Third, we constantly review the validity
of every position, and if there are
better alternatives, we may switch out
of poor performers.
For our short book, with the knowledge
that the downside could be unlimited,
we have a 20% cut-loss point, no matter
how confident we are of such ideas.
And lastly, what is your
short-term outlook for the Chinese markets
in general, and for investment avenues
for hedge funds in particular?
We believe that short-term outlook
of the A, B and H share markets remain
positive, but we are getting a bit cautious
on the valuations of financial and retail
sectors in the PRC market. Hong Kong's
local plays may continue to be boring,
but we did spot a number of undervalued
retail operators with PRC exposure that
may become tomorrow's stars. In Taiwan,
while investors are still very cautious
with the never-ending political scandals
dogging the market, we are actually
getting increasingly excited about the
longer term performance.