Alpha Hunter Jeremy King on Contrarian Asian Alpha Generation

Jeremy King of Knight Pacific talks to Hamlin Lovell about  his contrarian view of Asian investing. You arrived in Asia in 1985. How have the climate changed for equity investors?

Jeremy King: For us it hasn’t changed in 1000 years. Our alpha generation comes from being contrarian. This has been established since Rothschild bought stocks after the battle of Waterloo. It’s about psychology, betting against the herd, greed and fear, and under-researched stock. You don’t automatically bet against everyone else, but will do so if valuations justify it. No matter how sophisticated fund managers are, they panic when markets tank and get sucked into bubbles. Is this for behavioral reasons ?

Jeremy King: Basic human psychology is that people are scared to stick their neck out. But its even worse when people are not allowed to look for alpha, due to tracking error constraints. Most Asian funds are down as they were not hedged or not short. They just got sucked into the rallies. Are you making use of stock futures that make it possible to go short of mainland China stocks for the first time?

Jeremy King: We are not doing that yet. We are mainly shorting H shares listed in Hong Kong. You don’t need to look much further than the Hang Seng China Enterprises index, half of which is banks. We take absolute directional bets on a contrarian basis. Right now the mainland listed A shares are often cheaper than the H shares anyway. Guangdong Kelon, a fridge and aircon maker, is one exception where the mainland stock trades at a premium to the HK listing. On average valuations between A and H shares have almost completely converged, but there are anomalies for individual shares. Ping An for instance is 20% cheaper in China than HK. Sometimes the tail wags the dog – the HK listing is the main one. One interpretation is that the Chinese are less positive than the foreigners. The locals tend to get it right as they know better. Foreigners are the momentum chasers while locals have a better inside track.

We use A shares as target prices for shorts.

Main target on China banks is to fall to 1x book value as the BV itself is overvalued. What are your top contrarian bets ?

Jeremy King: HK property is 30 times the price of Dubai and 15 times the price of Thailand.

Uranium mining shares have lost 80% since the Japanese tsunami, but takeover activity is starting to pick up. Some people may be mothballing nuclear projects but China or India will not slow down their programs for a second : they desperately need the electricity.

Chinese car companies such as Warren Buffet’s BYD have come back all the way to his entry priced.

Bangkok is an unusual location. What aspects of the Thai regulatory framework attracted you there ? How much transparency should hedge funds offer ?

Jeremy King: It depends how big they are. The larger ones should be less transparent as their positions could be market movers. It is very brave for the giants to start offering full transparency at the position level. It might make sense for them to show industry exposures. We are highly transparent with existing investors, less so with potential ones, but it also depends on who the client is. We do not always want idea sharing. Opacity can create an air of mystique that can be lost by showing too much. You decided to complement a BVI fund with  a Luxembourg SIF SICAV, but did not jump on the UCITS bandwagon. What put you off UCITS and would you ever rethink ?

Jeremy King: Both funds follow similar exposure limits. The Luxembourg fund can go heavily to cash but shorts indices rather than stocks, and cannot be net short. We were guided by Luxembourg fund partners and the Swiss investor. In fact we are complying with the UCITS restrictions and could go the whole hog. However, we would not want to use swaps for shorting stocks as we have strict limits on derivatives. Is this also related to your Thai location in Bangkok ? How would you describe the Thai regulatory framework ?

Jeremy King: In Thailand, anything using leverage is classified as a hedge fund so we wanted one vehicle classed as a normal fund for the Thai domestic market. The Thai regulatory structure distinguishes between professional and retail investors: the former is assumed to be sophisticated. The regulation is strong at the capital market level – they have to report quarterly and can be suspended for late reporting. Its geared to the public interest. Individuals in Thailand do not pay tax on investments. Level One CFA ( of the local Thai equivalent ) is essential to be a fund manager in Thailand, and King is lobbying the regulator to accept level one CAIA as an alternative.

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