SHK Fund Management, the asset management arm of Hong Kong-listed financial services conglomerate Sun Hung Kai, has launched an Asia focused market neutral equity long/short quant fund. The SHK Quant Asia Fund has $10 million in seed funding from Sun Hung Kai, which will also share in the economics of the fund with the portfolio managers, Willy Ballmann and Tan Lien Seng.
The two managers have known each other since their university days at Cambridge in the mid 90s. Ballmann has spent the last eight years at the Government of Singapore Investment Corporation (GIC) where he worked, most recently, as a portfolio manager, trader and researcher in the group's quantitative investment unit. Tan has spent the same period rising the ranks of equity derivative trading at UBS in London and Hong Kong.
The new fund spans the pan Asian region, but will focus on the more developed markets of Japan, Australia, Hong Kong, Singapore, Taiwan and Korea.
Quant funds in Asia have historically been a rare breed outside of Japan. Recently a small number of quant driven funds have begun to spring up in the region, including Singapore-based Precise Capital and Octagon Capital, plus Hong Kong-based Maunakai Capital.
Ballmann believes Asia Pacific markets have sufficiently developed to make a quant strategy in the region increasingly feasible and attractive.
"We're looking at a universe of around 1,400 companies with a market cap above $500 million and a daily liquidity above $1 million," he says "It makes sense to use a quantitative approach to analyze this number of companies. A traditional bottom-up research driven stock picker would not be able to cover them all these companies."
Moreover, he points out that increased liquidity in the Asian markets and improved ability to access shorts, at decreasing costs of borrow, have also made the strategy more feasible.
The SHK Quant Asia Fund uses two proprietary investment models developed by the fund managers. The multi-factor model suggests a long /short basket of 50-100 names on the each side. The model uses both fundamental and technical inputs similar to what a traditional investor would use.
The second model uses a more statistical and econometric analysis on price action, trading on the mean reversion between pairs of stocks. The portfolio will include 20-60 pairs based on this model.
Tan explains that the two models are uncorrelated, which enhances the ability of the fund to deliver stable and attractive risk-adjusted returns.
The managers emphasize that while the model is systematic, it is not a black box. "We screen the models outputs to check they make intuitive sense," says Tan. "We also have to take into account other factors that the model cannot compute when we look at the outputs. For example, corporate actions, or the ability of stock prices to be influenced by controlling shareholders, are qualitative factors that we consider when we look at the model's outputs."
The fund is aiming for a return between 10%-15% and has an estimated capacity of $300 million.
"From a portfolio perspective there aren't many quant funds which span the Asian region, so our fund fills a niche," explains Christophe Lee, SHK Fund Management's CEO. "Moreover, the fund is also market neutral, which distinguishes it from the bulk of the regions equity long/short funds, which tend to be long-biased."
Lee says that SHK have set up a comprehensive team and platform to handle risk management and middle office functions for the fund. "With the growing institutionalization of the hedge fund industry, investors will take comfort that we are a listed company and our systems have undergone severe scrutiny and rigorous disclosure processes."
Lee expects the fund to attract investments from fund of funds, institutions and family offices mostly from US and European-based investors. He says that SHK have plans of building up an Asian hedge fund platform, and are currently in discussions with various other managers.
