Interview with Xiaobo Long, CEO & Managing Director of Cypress House Asset Management Company Limited
Managed by Cypress House Asset Management Company, the China Dragon Engine Fund employs a long/short equity strategy, investing in Hong Kong markets and Chinese enterprises that are highly related to China's economic growth.
The fund targets sustainable long-term returns by implementing disciplined investment process and rigorous risk management to leverage the investment strategy and dynamic asset allocation methodology. The fund has been listed on Eurekahedge and Asia Hedge as one of the top ten long/short equity funds during 2009.
The China Dragon Engine Fund was up a staggering 130% in 2009 while the Eurekahedge Greater China Long/Short Equities Index has gained 43% over the same time. How would you explain such a commendable outperformance?
Correct investment direction. We covered all the short positions in March 2009 and increased our long positions up to 70% in the second quarter. We expected to see the turning point in March 2009. A lot of stocks offered high safety of margin and the macroeconomics started to recover at that time.
We invested in the right sectors in different market cycles. For example, as the economy struggled during recession, we bought new energy stocks such as BYD Company Limited. As the economy was touching bottom, we allocated to resources, high-tech and real estate sectors which led market rally for a while. We were sensitive to the macroeconomic policy and pick-up stocks benefited the most from the government stimulus plan and the economic structure adjustment policy.
We consistently dug out undervalued stocks of sector-leading companies which have high growth prospects, excellent management team, stable cash flow and outperformance over its peers. Such stocks are long-term holdings representing 60% of the fund’s assets.
Meanwhile, we also looked at some short-term trading opportunities which represented 20% of the fund’s assets. For example, based on the economic recovery cycle – we thought strong cyclical stocks such as real estate and materials stocks would pick up first, so we allocated to these sectors, including steel, non-ferrous metals, real estate and marine transportation companies, at the start of the second quarter,. We held stocks of these sector-leading companies for a short period when they were undervalued and sold them when their market value picked up.
We got the right buying points for underlined stocks and we monitored the performance and the risks of the portfolio on a timely basis. Moreover, we strengthened the in-house risk management throughout the course of the research and investment process, diversified the portfolio with more safety assets in bond and cash and utilised a harder cut loss line for equities.
Your fund pursues a diversified portfolio across different asset classes and industries. How flexible are you in this diversification? Do you have any restrictions or cap in place in terms of the exposure to each sector?
We are very flexible within the following restrictions:
Stocks maintained at 50-70%.
Debt maintained at 0-40%.
Cash usually maintained at 0-20%.
Short position is very flexible.
Derivatives maintained at 0-20%.
One single-stock investment cannot be over 20% of the overall asset value.
Which allocations across different industries and asset classes have contributed the most to your returns over the course of this year? Which were your worst performing investments in 2008 when the fund lost 49%?
Real estate, material, energy and consumer stocks contributed the most to our investments. The airline sector was our worst performing investment in 2008 when the fund lost 49%.
What sort of fundamental/technical analysis do you perform on the underlying markets prior to making an investment?
We use top-down research to perform our investment. Our analyst must have researched the stocks in every detail, including studying the fundamentals of macroeconomy, underlined sector and the company, visited the management and observed stock price movements, etc. Valuation is the most important part of the research; our analyst must conduct a valuation on the stocks.
We would invest if the stock offers enough safety of margin and growth opportunity. From the technical side, we take a look at the K-line and the moving average to capture good buying/selling points or monitor the market movements of our holdings. We like stocks that are still not moving yet. However, technical analysis is a supplementary approach to our investment decision.
You list market timing as your secondary strategy. Can you please elaborate on what sort of methodology do you employ into achieving optimal market timing? Are there any quantitative models which you utilise to provide buy/sell signals?
From macroeconomics, we would evaluate major economic indicators to judge how the macroeconomy is doing.
From government policy maker to review our investment strategies.
From sector-moving situation.
From stock-moving K-line.
We do not utilise any quantitative models to provide buy/sell signals.
What sort of risk-control structures do you have in place to manage your fund’s investments during different market conditions? Has your risk management been more stringent over the recent times due to the high volatility across different sectors?
Bear market strategies: long/short combination.
Bull market strategies: long bias with harder cut loss line.
Yes. We have used more stringent risk-control methodology over the recent times due to the high volatility across different sectors.
Do you employ any leverage to enhance your returns? If so, how much leverage do you generally use and how is it distributed across different positions?
We do not use any leverage to enhance our returns.
Can you give an overview of the fund’s structure and management personnel?
Our fund is registered as a limited company in Cayman Islands on 18 September 2006. It is an open-ended private fund designed for fund of funds, family offices and high net worth individuals. Together with Liuyi Xie as the CIO & Director, the fund is managed by Cypress House which is regulated by Hong Kong Securities and Futures Commission. The fund is liquefiable every two weeks through HSBC according to the net asset value per share calculated by the administrator. The fund pays 1.5% management fee per annum and 20% incentive fee to the manager on a monthly basis.
The investment objective is to seek long-term capital appreciation through investing in China's economic growth opportunities, targeting maximised outperformance and high returns on a consistent basis. The fund invests primarily in H-shares listed on the Hong Kong Stock Exchange and B-shares listed on the exchanges of Mainland China. The fund applies flexible long/short equity strategy, top-down research approach and in-house risk management to secure outstanding risk-adjusted returns and long-term capital appreciation for the investors.
I have an over 18 years of rich experience in equities investment, M&A, asset management, corporate finance, and investment banking. I founded Cypress House in Hong Kong in 2004 and led the company to become an international China investment expert. Xie is the equities investment expert with total asset under his management over US$2 billion during his career. He was awarded for excellent investment returns to Shenzhen Social Annuity. He has numerous research outlets. His research on energy and material sectors was remarkable for generating great contribution to the fund’s performance.
Is there a particular niche of investors that you are aiming to attract for investments into your fund? Would you like to comment on the profiles of investors in your fund and how do you think the fund would be suitable for a potential investor looking to gain exposure to the Chinese market?
Our fund is open for both institutions and high net worth individuals who have high return expectations on long-term investments. Individual investors who have the amount of cash set aside for investment will be good investors to share the long-term capital appreciation of the fund. The fund is also an ideal option for fund of funds to diversify with high return investments in the portfolio.
Our investors are high net worth individuals and Hong Kong - listed companies. Most of them know the managers very well for long term and participate in the fund during 2006 and 2007.
For a potential investor looking to gain exposure to the Chinese market, our current clients have the following character as they need to consider some criteria for their assets:
First of all, the experience of the manager and the track record of the fund must convince the investors. The manager of the fund is teamed up with the pioneer and most experienced investment experts in China who have grown up along with China’s financial industry from the beginning in the end of 1980’s.
Secondly, we execute a disciplined investment process and stringent in-house risk management. We consistently invest in advantage valuation with good fundamentals and high growing space based on our broad view on macro and microeconomies and in-depth analysis on the underlined investment. We execute internationalised management structure and partner with leading financial institutions. We maintain high transparency for investors who have the power to access our portfolio and investment details any time upon request. During the global economic recession, we implemented more stringent risk management and investment discipline to safeguard the assets. We adhere to consistency, transparency, discipline and strong commission to our investors in the long run.
Thirdly, the fund invests most assets in high liquid equities, which enable the investors to liquidate their investment within short notice.
Which sectors do you expect would do well in 2010 and what are your assumptions for your preference for these sectors?
We believe consumer stocks would outperform other sectors this 2010 and high-growth technology stocks will have good performance as well.