PEREGRINE fund management venture Falcon Strategies is entering Hongkong's competitive unit trust industry with a new fund combining Asian equity investment with exposure to derivatives in the region. The Cayman Islands, US dollar denominated Peregrine Options and Derivatives fund is intended to provide a high level of return commensurate with a controlled degree of risk by applying quantitative, computer-driven investment methods to Asian equities and equity derivatives such as options, warrants, swaps and futures. Mr Patrick Wong, managing director of the joint-venture Falcon Strategies, says the fund is the first of its kind to combine equity investment with derivatives in Asia. Falcon Strategies is jointly owned by Peregrine and the senior staff at the fund-management group. It is their intention that the operation should become a major local and regional player in the fund industry. It poses little threat to the current handful of major fund management players in Hongkong on the retail side as its supporting investors are probably not present unit holders. On the institutional side, the company will need to establish at least a three-year track record before being considered for long-term major accounts in the territory, outside the Li Ka-shing group interests or associates. This following, built up since 1988 through new listings and a whole series of corporate financial transactions, will almost guarantee a front-row seat in the industry sales and redemption stakes. The industry at present covers only two per cent of the local population, mostly expatriates and well-heeled Chinese who have lived abroad and have a knowledge of unit trusts. Peregrine will bring new unit holders to the industry and, given that they follow up the current launch with a whole series of products tailored for local investors, the company could take in some US$200 million to $300 million in the first two or three years. The options and derivatives fund, to be officially launched on March 1, is an open-ended unit trust with a minimum investment of $5,000. The initial charge is five per cent and the annual management fee is a low 0.5 per cent, compared to the usual 1.5 per cent. There is a performance fee payable to the manager at the end of each financial year, but only if the net asset value per unit at the end of that year exceeds the net asset value against which it is measured. The incentive fee, if there is one to pay, will be 15 per cent of the excess. The pricing policy followed by the fund is forward pricing in line with international fund management standards. This means an investor dealing in the fund's unit will not know what price he or she is buying or selling at until the completion of the revaluation of units in the fund at the time of dealing. Dealing is weekly, on each Thursday at New York close, or at the same time on the next following business day. Subscriptions must be in by the Monday of each week at 3 pm. In addition, 30 per cent of the fund must remain in cash. The fund is not allowed to use leverage as a means of enhancing returns and it is not allowed to write naked options. Under the computer driven investment strategy the fund will seek out investment opportunities across Asian blue-chip stocks and will calculate the optimal level of direct and synthetic exposure to be achieved along with the type of protection or enhancement strategies needed to control risk. The derivatives to be used include call and put options, equity warrants, equity swaps and stock index futures, where they are available. They may be exchange traded or over-the-counter. With these the manager plans to exploit arbitrage opportunities. Index futures will be employed only in hedging and cover write strategies. Most of the net asset value of the fund will be in such instruments during the fund's life. High direct equity content will figure only over short periods.
