Institutional Investor's Alpha Magazine - February 2008 - (Page 40)

Cheah Cheng Hye Value Partners CEO Franco Ngan says that the ﬁrm is by far the most proﬁtable hedge fund company in Asia. The numbers seem to bear out his claim. Value Partners had a gross proﬁt margin of 56.4 percent for 2006. Net proﬁts leaped from HK$237 million ($31 million) in 2005 to HK$856 million ($110 million) in 2006 (the firm will not release its 2007 numbers until March). Value Partners holds the No. 1 spot among all publicly traded alternative investments groups in the ratio of estimated proﬁts to assets under management for 2007, according to estimates by JPMorgan. The ﬁrm recorded proﬁts as a percentage of assets under management of 3 percent, followed by 2.6 percent for London’s Man Group and 2.4 percent for New York–based Blackstone Group. Value Partners was second in Alpha’s 2007 Asia 25 ranking of the largest Asia-domiciled hedge fund firms, behind only Sparx Group Co. of Tokyo, based on assets under management. Value — CHEAH CHENG HYE Partners, however, is far more proﬁtable than Sparx, which had an estimated ratio of proﬁts to assets under management of just 0.8 percent last year, according to JPMorgan. Cheah says that, within the next generation, Asia will support more world-class investment ﬁ rms than it does currently, with brands as powerful as big Western names like Fidelity Investments — with his own ﬁrm, he hopes, leading the list. Change could come faster than he expects, as Western banks troop one after another to borrow money in Abu Dhabi, Beijing and Singapore — a clear indication of the growing importance of the East in world ﬁnance. Cheah’s ambition predates the mayhem of recent months, however, which has included the subprime crisis in the U.S. and the Société Générale trading ﬁ asco in France. He says he recognizes that almost any ﬁrm can be blindsided by a rogue trader and keeps on display a copy of the loyalty oath he requires employees to sign. His biggest challenge, Cheah says, is to offer a corporate culture that appeals to the young people he employs. He says a fundamental part of his management philosophy is to delegate authority, using it as a reward for performance. Though he makes clear that slackers are unwelcome, he says he worries that if he does not get conditions just right for his team members, they will leave. This despite the fact that only one senior fund manager has ever left Value Partners, and he returned to the fold two years later. One of his other challenges has been to upgrade his business model from one-man rule to a system that will free him up to concentrate on research. Cheah admits that shortly after 2000, when Value Partners’ assets passed $1 billion, the ﬁrm became bogged down by his role as the only person with the power to issue buy and sell orders. To break out of that box, he separated business management from research, freeing himself up to focus on the latter. (His business card, however, still names Cheah as chief investment ofﬁcer, a title he has held from the start.) Alpha Contributing Writer Henry Scott Stokes recently sat down with Cheah at Value Partners’ new ofﬁces in the Wanchai section of Hong Kong to discuss the potential for hedge fund growth in his part of the world. Alpha: What is the outlook for the Great Bubble of China? Cheah: Don’t be overly inﬂuenced by the headline news. “There are still worries about China . . . the lack of the rule of law, the lack of independence of the judiciary.” China’s fundamental advantages — and weaknesses — haven’t changed that much, even with the emergence of ﬁnancial difﬁculties in America and elsewhere in the world. Chinese economic growth is slowing from a peak reached in 2007, but is projected to remain at a pretty high level, of 9 to 10 percent, this year and next. As for the domestic stock markets in Shanghai and Shenzhen, which resemble casinos, the sharp swings up and down have been a recurrent feature over the years. So long as the banking system remains solid — banks provide the bulk of the ﬁ nancing for corporate and individual use in China — the Chinese system as a whole will carry on. And the banks are in solid shape, with relatively little exposure to share ﬁnancing. Hong Kong is in robust shape. The main concern here is overheating, as the Hong Kong dollar is signiﬁcantly undervalued and unemployment is zero in practical terms. What do you see as the role of hedge funds? I think investors would like funds to do more hedging. So obviously people like us who are product suppliers — we are the factories — we are anxious to be called hedge funds because we know that’s what the market wants. But in the real world I work in, where I actually go out there and make money for my clients, the market here in Asia has very little scope for real hedge funds to do the job. A crucial point. Yes. We are really struggling to hedge. What are the instruments available? Until now mainland China does not allow shorting. Second, we were told that foreigners — and we’re deﬁ ned as “foreigners” in Hong Kong — would not be allowed to participate in the markets anyway! So how do you hedge against a long position in mainland China stocks? In Hong Kong itself — apart from large-cap, well-known stocks — it’s actually very hard to hedge a medium- and small-cap portfolio, even if it’s legally allowed. The liquidity is not there. The transaction costs are very heavy. Are hedge funds largely an Occidental phenomenon? Occidental? I would say it’s a product that was conceived in New York and London. They would like to apply it to 40 • INSTITUTIONAL INVESTOR’S ALPHA • FEBRUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - February 2008

Institutional Investor's Alpha Magazine - February 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Alternative Perspective The Good Guys: A Simple Plan Cover Story: Energy and Commodities: Fueling Opportunity Regulation: Energy Trading: The Brawl on the Hill Interview: Master of Values Regulation: Hedge Fund Registration: Way Out West Research Center: Top Hedge Fund Analysts Alpha Bytes: Rocket Man Unhedged: Commentary: Structured for Success

Institutional Investor's Alpha Magazine - February 2008

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