New World scion’s family office plans equity hedge fund to capture improving market sentiment
- Avantua family office plans to launch its first hedge fund as early as this quarter to bet on price swings in Hong Kong, mainland stock markets
- Firm seeks US$50 million to kick off the fund with own money and from outside investors
The firm, founded in 2019 by Adrian Cheng Chi-kong of New World Development, is seeking to raise US$50 million in the new venture, with about one-fifth its own money and the rest from outside investors, according to managing director Xu Hao. It aims to complete the fundraising by September and start investing using a long-short strategy, he added.
The firm currently manages US$2 billion of assets, focusing its equity investment in private companies in its first two years of operations. A rout that erased US$2.5 trillion of capitalisation over the past 12 months from members of the MSCI China Index has now made equity valuations appealing again.
“When we first started, the market was red-hot and everyone was on a buying binge and many of them just put in money with their eyes closed,” Xu said in an interview. “We did not jump in as we felt such a craze could be dangerous and get us burned. Now, the market has cooled down. We believe it is time to [make a] move.”
Cheng is the third generation scion and eldest grandson of the late Cheng Yu-tung who founded Hong Kong developer New World Development. The Cheng family was credited with more than US$26 billion in net-worth by Forbes in February. He is the chairman of Avantua.
The decision to launch a hedge fund comes with challenges. The US$2.4 trillion hedge fund industry has struggled to make money for investors as Russia’s invasion of Ukraine pushed key commodity prices to new heights. The fastest-rising inflation in four decades in the US has also led to the most aggressive policy tightening by the Federal Reserve since 1994.
Returns fell for a second month in May as policy tightening in major economies stoked concerns about recession, according to an index compiled by Singapore-based Eurekahedge. The year-to-date loss amounted to 2.66 per cent, or US$2.4 billion in performance-based decline.
“We see a window now,” said Edward Liu Chang, chief investment officer, who joined Avantua in April. “While the US is tightening policies, China is loosening up to save the virus-hit economy.”
China last week halved the quarantine period for inbound travellers to seven days in state-approved facilities, plus an additional three days at home. It was the first such easing to its zero-Covid policy, which helped strengthen an ongoing rebound in stock prices.
“There have to be more supportive policies from the government to keep the economy afloat,” Liu added. “And considering that the key driver of China’s equity market is still policy, we believe that it is bottoming out. We really hope that we can ride on it and start our position now, particularly in those government-friendly sectors, like next-generation energy and new infrastructure.”
Avantua’s long-short strategy would allow the hedge fund to be a long-term investor in cheap stocks, as well as betting against overpriced stocks.
The Hang Seng Index rose for a second month in June, the first back-to-back streak since May 2021. The CSI 300 Index, which tracks the biggest stocks traded in Shanghai and Shenzhen bourses, also logged a two-month winning run to approach a bull-market territory. The MSCI China Index jumped 5.7 per cent, the best since a 7.4 per cent rally in January 2021.
Investors have ploughed in more cash to chase the market. Mainland investors were net buyers of HK$128.9 billion (US$16.4 billion) since the Hang Seng Index hit a six-year low on March 15. Foreign investors separately loaded up almost 100 billion yuan (US$14.8 billion) of onshore stocks.
Avantua’s “ultra goal” is to build a track record and become a top investment firm in China and Asia over time, managing director Xu added.
“To achieve that, we need to establish a brand that can consistently make gains for our shareholders and investors in the long run,” he said. “Now is a good time to step into the secondary market.”