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Former Deutsche Bank Saba Asia Head Said to Plan New Hedge Fund

Date: Tuesday, March 9, 2010
Author: Bloomberg

The ex-Asia head of Deutsche Bank AG’s Saba proprietary trading desk is planning a hedge fund seeking to profit from mispricing of securities in Asia’s equity and credit markets, said two people with knowledge of the matter.

Hong Kong-based Nine Masts Capital intends to start the relative-value capital structure arbitrage fund in the second quarter, said the people, who declined to be identified because the information is private. The fund’s Chief Investment Officer Wang Bing, the former head of Deutsche Bank’s Saba Principal Strategies in Asia, declined to comment.

Managers and traders leaving international banks and asset managers after the financial crisis are starting relative-value and event-driven hedge funds. That’s diversifying the Asian industry, which was previously dominated by equity-short funds, and may offer returns less linked to market direction.

“Some prominent western organizations reduced their commitments to Asian operations, leading their Asian teams to look at standalone options,” said Frederick Ingham, Neuberger Berman Group LLC’s Hong Kong-based head of hedge-fund investments in Asia-Pacific. “Event-driven and relative-value players tend to be more cautious in their approaches to hedging portfolios.”

Nine Masts co-founder and senior portfolio manager James Tu, 33, oversaw for Stamford, Connecticut- and Hong Kong-based DKR Oasis Management Co. LP convertible bonds, volatility and equity arbitrage investments, the people said. Tu, who managed a fixed- income fund at Merrill Lynch before joining DKR Oasis in 2002, didn’t immediately return a message left on his mobile phone.

Relative Value

Relative-value strategies accounted for 18 percent of the number of Asia-focused hedge funds by the third quarter of 2009, up from 16 percent a year earlier, according to Chicago-based Hedge Fund Research Inc. Such strategies, a category that Nine Masts falls into, seek to profit from the mispricing of different asset classes and securities without taking a bet on the overall market direction.

Eurekahedge Asia Relative Value Hedge Fund Index retreated 10 percent in 2008 when the Singapore data provider’s broader Asian Hedge Fund Index lost nearly 21 percent in its worst annual loss in history. The relative value gauge gained 24 percent last year against the 26 percent advance for the broader Asian hedge fund index.

Nine Masts is named after the treasure ships said to be used by the Chinese explorer Zheng He on his expeditions to Southeast Asia, South Asia, Arabia and East Africa in the 15th century.

Multiple Securities

The Nine Masts fund will seek a 15 percent annual after-fee return by investing in any company that has multiple securities in issue, including senior, subordinated, secured, unsecured and convertible bonds, loans, credit default swaps, common and preferred shares, equity options and depositary receipts. It may also trade CDS indexes and index futures, said the people.

Wang, 41, was a founding member of the Saba proprietary trading desk headed by Boaz Weinstein. Wang set up Saba’s operations in Asia, managing $1 billion of investments in credit, equity, equity derivatives, convertible securities and private structured products in the region, the people said.

Wang joined Deutsche Bank as a credit derivatives trading associate in 1999. He had been profitable in nine of the last 10 years, the people said without giving specific numbers.

The Saba desk, which managed $10 billion, lost about 18 percent in 2008, the only losing year out of Weinstein’s 11 years at Deutsche Bank, a person with knowledge of the matter told Bloomberg in June. The team made at least $600 million of profit the year before, people with knowledge of the matter told Bloomberg in January, 2009.

Saba Capital

Weinstein left last year with about 15 of his colleagues to set up his New York-based fund house Saba Capital Management LP. Wang left Deutsche Bank in December 2008 when it decided to pull the plug on Saba, two people told Bloomberg then.

Another Nine Masts co-founder, Ron Schachter, worked with Wang on the Saba desk in Hong Kong, managing a portion of the capital structure relative value investments in the region. The fourth founder is Chief Operating Officer Glyn Treasure, who worked as a business and risk manager for investment banks, most recently JPMorgan Chase & Co., the people said.

Nine Masts will find investment opportunities in securities that are diverting from their historical pricing relationships, mispriced based on the companies’ financial fundamentals, or technical pricing trends, the people said.

Part of its trades will involve buying one credit product of a company and going short on another, such as senior versus junior bond, bond versus credit default swap, or two-year bond against five-year bond, the people said.

Another portion of its investments will pair credit with equity investments, they added. A third category of trades will seek to exploit the mispricing of various classes of shares issued by the same company, or its shares traded on different exchanges as well as the mispricing of stock of a holding company against that of an operating subsidiary, they added.

A final category of trades will profit from corporate actions and events that affect a company’s capital structure, they said.