Pictet launches regulated China hedge fund

Date: Thursday, September 23, 2010
Author: Reuters

* Long-short fund to be launched under UCITS format

* Manager says has been increasing investment since April

* Manager likes mass market, luxury retailers

By Martin de Sa'Pinto ZURICH, Sept 22 (Reuters) - Swiss private bank Pictet & Cie has launched a Greater China equities hedge fund it can sell to both professional and retail investors under an EU-regulated structure designed to limit risk. It presented the Pictet Total Return Mandarin Fund on Wednesday to expand and build on one of its existing funds using the UCITS III regime, which restricts the use of leverage and imposes strict liquidity requirements and clear asset pricing, .

"The underlying fund has a very successful track record, and there was a lot of demand from institutional clients, but many could not invest in offshore funds, so we have now launched it as a UCITS," said portfolio manager Lan Wang Simond.

Simond has been investing in the China region for 16 years, and as a senior investment manager in Pictet's emerging markets equities team she has managed Pictet's Greater China fund since it was launched in 2003.

After being negative on China this year up to April, when its net exposure was just 31 percent, the fund has been buying on dips and covering short index positions, and was 70 percent net long by the end of August.

"The second quarter slowdown was very severe, and the market was very concerned about a hard landing for the economy, but we believed that was already priced in to stocks in the sharp market downturn in the first quarter," Simond said.

"Now the economy is stabilising, manufacturing and exports are rising, so our soft landing scenario is taking shape. We think the worst of the slowdown is over." The fund invests in Hong Kong-listed H-shares and in American Depositary Receipts, and hedges via index futures, which Simond said were inexpensive and liquid.

One of the fund's principal themes is the growth of internal consumption as the disposable income of Chinese consumers rises.

"With the global crisis we have seen a consumer crisis in the developed world, and China has had to rely more on domestic consumption. This will improve with rising minimum wages, more worker protection and a stronger renminbi," Simond said.

She is investing in dominant companies serving mass markets, such as sausage-casing supplier Shenguan (0829.HK).

"They have a quasi monopoly with all the attributes we like: dominance, scale, barriers to entry," she said.

She also tips Haier Electronics (1169.HK), an electronic goods distributor and the only company in its sector with distribution networks in Tier 4 and 5 cities.

Simond also likes very high-end consumer products, such as luxury watch retailer Hengdeli (3389.HK) and fashion retailer Trinity (0891.HK).

"The emerging economies are producing lots of new billionaires each year, so luxury goods have a very bright future in China," she said.