Pinpoint Funds Beat Peers With China Stocks, Bonds

Date: Tuesday, August 25, 2009
Author: Bei Hu, Bloomberg

Pinpoint Investment Advisor Ltd., a hedge fund manager of $560 million, returned as much as four times its Asian peers this year through July with profits from a rebound in Chinese stocks and debt securities.

The $70 million Pinpoint Opportunities Fund, which gained 85 percent in the period, invested about half its assets in convertible and high-yield bonds, including those of Chinese property developers, said Duanmu Yongshan, Pinpoint’s Hong Kong- based chief marketing officer. The $300 million Pinpoint China Fund returned nearly 51 percent in the period, he said.

Stock-focused hedge funds, the hardest hit in Asia amid last year’s market slump, are leading the recovery in 2009. The Eurekahedge Asia Long/Short Equities Hedge Fund Index returned 19 percent this year through July, the best-performing strategy among eight tracked by the Singapore-based data provider. The index fell 22 in 2008, the worst since at least 2000.

“We think fundamentals will play an increasingly more important role relative to liquidity for the second half,” said Duanmu in an interview on Aug. 24.

The China Fund, which targets companies with a market value of more than $2 billion in Greater China, bet on a recovery in Chinese property and banking stocks it bought, he said. He declined to name specific companies.

Falling Volatility

The Hang Seng China Enterprises Index, which tracks 43 Chinese companies listed in Hong Kong, rose 48 percent this year after losing 51 percent of its value last year.

The funds’ gains this year showed “the fundamentals-drive approach is still richly rewarded by the market when it is not in a panic mode,” said Duanmu.

The 100-day price volatility of the Hang Seng China Enterprises Index more than halved after reaching its highest in at least nine years in January, Bloomberg data show.

Pinpoint China Fund, led by the company’s Chief Investment Officer Wang Qiang and Huang Yong, lost 35 percent of its net asset value last year, the first annual loss since its June 2005 birth. The Opportunities Fund, started in August 2007 and overseen by Huang and Rubin Jiang, declined 43 percent in 2008, according to investor newsletters. The fund focuses on small- and medium-sized Greater China companies.

“Fundamental-driven research is always relevant, but last year showed people that you cannot rely on fundamentals alone,” said Simon Potter, a Hong Kong-based investment analyst with Triple A Partners Ltd., which provides startup capital and marketing services to hedge funds.

Property, Banking

The China Fund achieved the gains this year with about 50 percent net exposure -- the difference between the amount that funds wager on rising and falling stocks -- said Duanmu. More than half of the fund’s return in the first half was driven by investments in the Chinese property, banking and internet gaming industries, he added.

Pinpoint from November through the first quarter ramped up investments in Chinese property companies, which had been battered last year by the global market rout as well as increased domestic taxes and interest rates to curb overheating in the industry.

“We felt the industry was seriously undervalued,” said Duanmu. “We live in China and could follow regional situation and statistics more closely. We beat the market to it.”

Hong Kong-quoted shares of Sino-Ocean Land Holdings Ltd., Beijing’s largest developer, more than doubled this year after slumping 64 percent in 2008. Shares of Agile Property Holdings Ltd., a Guangzhou-based builder listed in Hong Kong, surged 138 percent this year.

Bonds

The funds started to build up investments in Chinese banking stocks in the first quarter as de-leveraging and market panic forced other investors to sell, Duanmu said. They also brought shares in Chinese internet gaming companies, betting on increasing popularity of their products and services, he said.

Convertible and other bonds accounted for 63 percent of the Opportunities Fund’s investments and 68 percent of profits in the month of June, according to a Pinpoint investor newsletter. The fund had no bond holdings before October 2008, Duanmu said. About half of its convertible bond holdings were issued by Chinese property developers, he added.

JPMorgan’s Asia non-investment grade credit index gained 33 percent this year after last year’s 18 percent decline.

The rally prompted Pinpoint to free investors in the Opportunities Fund from July 1 from a two-year lockup of their investments introduced at the beginning of the year. It also reopened the Opportunities Fund to new investors.

Both funds sold borrowed shares of Chinese building materials makers, such as producers of cement, believing they’re overvalued with an unattractive business model under pressure from increasing competition, Duanmu said.

Pinpoint trimmed its banking and property-related investments in the second quarter after their recent rallies and instead increased investments in consumption-related industries less affected by overall market moves. It also swapped some of its stock holdings for bonds issued by the same companies to protect itself from an equity market correction, Duanmu added.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net