Singapore Hedge Fund

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Overhaul of fund regulations looms in China

From Asian Investor comes the news that in October, China’s National People’s Congress will review a substantial reform of the fund laws proposed by the China Securities Regulatory Commission (CSRC).
Less than six months after taking charge of the fund supervisory division at the CSRC, the new director-general Wu Qing is already making his presence felt in the industry.

Under Wu’s leadership, the division has recently submitted a proposal to the National People’s Congress (NPC) advocating a serious overhaul to the regulations controlling the Rmb2 trillion ($292.8 billion) fund industry in China. On July 6, the NPC called the first financial committee meeting to review the suggested rule changes.

Prior to taking up his role at the fund division, Wu was best known as a ‘risk hawk’ responsible for cleaning up bankrupt securities firms. He was involved in drafting China’s first set of risk disposal rules for the brokerage industry.

Hubert Tse, managing director and head of the international business group at Yuan Tai PRC Attorneys in Shanghai, says depending on the political will and consensus to be gathered at the NPC level, the regulatory review could either result in minor tweaking to the existing securities investment rules, covering issues such as investor protection, fund manager compensation and trading restrictions; or it could be a major overhaul, changing the way the investment industry is regulated in China.

If fully passed, the CSRC will see its regulatory power expand to cover the private fund industry in China. Tse believes the move will be the CSRC’s most forceful attempt yet to create a level playing field between private and mutual funds, and ensure stability in the functioning of the capital markets.

The NPC is expected to vote on the matter in the coming annual gathering in October. If passed, the changes would be implemented by March 2010 at the earliest.

Currently, private funds are not regulated and have benefitted from operating opaque investment structures. They also rob the mutual fund sector of talent; at one point in 2007, private funds were said to be responsible for a 30% turnover in investment staff in the mutual fund sector.

One of the most feted private fund operator is Lv Jun, a former CIO and star manager at China International Fund Management, J.P. Morgan’s asset management joint venture in Shanghai. Lv has since banded with Chung Man-Wing, a former MD at JF Asset Management in Hong Kong and Peter Tang, a portfolio manager in charge of JF’s Taiwan portfolio in founding their Greater China fund.

In 2009, against a background of strong market momentum in the A-share market, private funds have re-emerged as a serious threat to the stability in the mutual fund industry. These funds have handed out handsome perks to lure fund managers who are otherwise attracted to the lack of disclosure in these funds’ daily dealings. Observers have also blamed private funds for creating excessive volatility in the market.

The CSRC has made several attempts to protect the mutual fund industry from private fund threats. It has approved various new lines of business that help the industry to gain ground on the private fund sector.

Further to the segregated mandate business it approved in 2008, it has recently permitted general partnership arrangements in which fund houses can raise funds through quasi-hedge fund setups. Fund houses can tailor-make aggressive investment products specific to clients without disclosing activities in these portfolios to third parties.

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Yet another Hedge Fund starts in Singapore: GCS Capital Management

At that point, it is more than a trend…

Stephen Satchell, the former Tokyo- based head of Asian proprietary credit trading at Credit Suisse Group AG, plans to start an Asia-focused credit hedge fund as early as this month.

The GCS Asian Opportunity Fund I will offer “small-to- medium sized” loans, mostly with an equity component, to companies in the region, said Satchell, 40, who set up Singapore-based GCS Capital Management. The fund could grow to $500 million to $750 million and will target annual gross returns of about 25 percent, he said in an interview on July 10.

GCS Capital is seeking to take advantage of trading opportunities in credit markets as banks and hedge funds sell assets at a discount to repair balance sheets or exit the region. Banks and brokerages worldwide have tightened lending and scaled back trading to conserve capital after reporting almost $1.5 trillion of losses and writedowns since the U.S. subprime mortgage market collapsed, data compiled by Bloomberg show.

“The goal of the fund is to be fairly nimble and opportunistic to focus on transactions that we think are mispriced,” Satchell said in a telephone interview from Tokyo, where he is currently based. “The secondary transactions will come from the investment banks and hedge funds that were involved in that business two or three years ago and are no longer involved.”

He said he plans to move to Singapore, where most of the firm’s transactions will be “originated and worked on.” The fund will initially invest in companies in Japan, China, Indonesia and India, he said.

Second Fund

Satchell, who will start trading with his own capital, said he is in talks with “two large institutional investors” who will likely put money into his fund. He declined to name the institutions.

GCS Capital also plans a second fund with a “longer-term lockup” that will invest in “more illiquid type of credit” such as commercial mortgage-backed securities and private loan transactions, he said.

“There are a lot of assets out there trading at economic levels for a variety of reasons usually not related to the actual underlying fundamentals of the borrower,” Satchell said. “We’re going to look at a variety of things on an opportunistic basis.”

While raising capital has been “hard,” Satchell said he is “fairly optimistic” that money will flow back to the hedge- fund industry.

Sidelined Money

“There is a lot of money on the sidelines, in institutions which just can’t sit there for too long,” he said. “Wealthy individual investors can always pull out in theory because they don’t mind keeping their money at zero; institutions, whether insurance companies or pensions funds, need to make money and zero doesn’t quite cut it.”

Hedge funds, beset by investor withdrawals in 2008, had net inflows for the second consecutive month in June, when they attracted $4 billion, according to Singapore-based data provider Eurekahedge Pte.

Satchell was the head of Asian credit trading at Commerzbank Securities in Tokyo from 2001 to 2003. He previously ran the Asian structured products group for four years at ING Barings and was based in the Japanese capital and Hong Kong.

With Bloomberg

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China: the risk of Selling Foreign Exchange Derivatives Under Control

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The People’s Bank of China, the central bank, recently made an investigation on derivatives operation of six domestic commercial lenders.

They included Industrial and Commercial Bank of China (ICBC, SHSE: 601398, and SEHK: 1398), Agricultural Bank of China (ABC), Bank of China (BoC, SEHK: 3988 and SHSE: 601988), China Construction Bank (CCB, SHSE: 601939, and SEHK: 0939), Bank of Communications (BoCom, SEHK: 3328 and SHSE: 601328) and China Development Bank (CDB). Such investigation actually has been made by the China Banking Regulatory Commission (CBRC), the top Chinese banking regulator, and the conclusion it reached is that the risk for commercial banks to sell foreign exchange derivatives is under control, revealed an insider.

Currently, foreign exchange derivatives sold in the country include foreign exchange option, foreign currency swap, foreign exchange interest swap and etc. The floating losses commercial banks suffer from selling such products has dropped to different extents thanks to rebound of the global market and importance they attached to downsizing such business. Statistics show that such business’ notional principal amounts of the nation’s Big Four state-owned commercial banks
, including ICBC, ABC, BoC and CCB, each has slid abut 50 percent since the fourth quarter of last year.

In addition, they lowered the proportion of complicated structural products in succession. Complicated structural products are always designed by foreign banks and faire value accounting of those products is also provided by them. They have become two big obstacles on the way of the growth of their Chinese partners’ derivatives business.

In order to reduce risk, Chinese companies have no choice but to buy foreign exchange derivatives. The pricing right is tightly controlled by foreign banks despite that the products are sold by their Chinese partners. As a result, a considerable part of the profit those Chinese banks gained from the business is taken by foreign banks.

Foreign banks know little about Chinese companies, so they prefer to sell products to the latter via Chinese banks. Those Chinese banks have to loan money to buyers of such products provided that loss takes place. Under such environment, those Chinese banks will be under rising credit risk. And the best way for them to solve the problem is to ask buyers of such products to pay deposits, added the insider.
with Trading Markets

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Soros sees green shoots…

Billionaire hedge fund manager George Soros said the worst of the global financial crisis is over, and called for new international regulations to maintain open markets.
“Definitely, the worst is behind us,” Hungarian-born Soros said in an interview yesterday with Polish television station TVN24.
He called the crisis the most serious in his lifetime, adding, “This is the end of an era. The question is what’s going to come out of it in the future.”
Without new international regulations, “globalization will fall apart,” possibly spawning a system of “state capitalism” like the one that exists in China, he said.
Soros, who recently returned from China, said the world’s third-largest economy is “growing in strength” because the country was relatively unaffected by the crisis.

source: bloomberg

Jean Viry-Babel
senior partner
VBK partners

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