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Hedge fund Pharo sees yuan up 5-7 pct

Date: Monday, January 31, 2011
Author: Reuters.com

Guillaume Fonkenell, who founded the emerging market-focussed hedge fund a decade ago, cited the "enormous pressure" on the Chinese authorities to let the currency appreciate further as the reason for his conviction for the larger-than-expected rise.

"All of the sound bites from the Chinese authorities over the past few months suggest that they have decided to allow a further rise in the renminbi this year," Fonkenell said. "While the numbers we hear in the market are in the 3-5 percent range, at Pharo we believe that they will be a bit bolder."

The yuan is also known as the renminbi. Fund share classes are variations of a fund in different currencies.

Pharo's yuan share class, the first from a hedge fund tapping the nascent offshore yuan market in Hong Kong, has a capacity to take in about $500 million and will sit with the firm's existing funds denominated in currencies such as the dollar and the euro.

Fonkenell said recent liberalisation of rules governing the offshore renminbi market and increasing liquidity, mainly in Hong Kong, allowed Pharo to structure the share class to gain from what he believed would be an appreciating currency.

The yuan rose 3.6 percent against the dollar in 2010 and a Reuters poll expects it to gain about 5 percent this year.

Fonkenell, whose flagship fund has never given a negative annual return, said there were also "solid economic reasons" for China to let the currency appreciate.

"A stronger renminbi will distinctly enhance their ability to conduct monetary policy consistent with their existing growth and inflation profile," he said.

He added that it would allow China to transition to a more domestic consumption-oriented economy and lessen dependence on capital investment and exports.

China's rapidly growing offshore yuan market in Hong Kong has become a darling of borrowers and investors, less than a year since trade settlement and investment rules were eased to allow more participants.

According to the latest statistics from the Hong Kong Monetary Authority, renminbi deposits increased to total 280 billion yuan ($42 billion) at the end of November last year from just 60 billion yuan at the end of 2009, a 367 percent increase.

Fonkenell did not disclose the exact hedging structure for the share class but said his team would manage the currency exposure by using derivatives such as cross currency swaps and foreign exchange forwards in the offshore renminbi market.

The money manager counts European and U.S. institutional investors among its main clients and is run by a team of 50 people from London and New York.

The hedge fund opened an office in Hong Kong about six months ago, employing five people, and is looking to double the headcount over the next two years, joining the likes of GLG, Soros Fund Management, Moore Capital, Maverick Capital and Viking Global Investors who are making a beeline for Asia.

The hedge fund, which has doubled its total assets under management to $4 billion in the last two years, trades foreign exchange, fixed income, credit and equity indexes.

Pharo, which means lighthouse in French, will make the yuan share class available to investors in February and hopes to close the fund to investors in about three months time.

"With the diminishing role of the dollar in the global economy, it makes sense to offer investment products in the other currencies which are bound to capture more international trade and investment flows and the renminbi is one of the obvious choices," Fonkenell said.

(Editing by Chris Lewis)