Bo Hong is the manager of the Horizon Asia Fund, an Asia
including Japan equity long/short fund. The Fund was launched
in June 2002 and seeks to maintain a concentrated portfolio
of well-researched long and short positions that are generally
not expected to exceed twenty names. The Fund currently has
US $10m in assets. The Fund is approximately +1.4% in March,
+5.1% ytd and +3.9% since launch.
Prior to launching the Fund, Bo Hong was managing director
at Bear Stearns & Co., Inc. in New York and Hong Kong,
where he was a permanent member of the firm's Stock Selection
Committee and an investment strategist covering Asian markets.
From 1996 to 2001, Hong served as an equity research analyst
and sequentially covered Asian infrastructure, properties
and conglomerate sectors. He is currently based in Hong Kong.
Interview with Bo Hong
- Coming from an equity research background, what have
been the most difficult aspects in running your own hedge
When we started in June 2002, Asian markets were at
an inflection point. After having rallied in the prior
months, Asian markets re-coupled with the down trend in
the US and Europe. It was an exceptionally dangerous and
challenging environment to start in.
Since our inception, Asian markets are down between -13
to -22%. We are up approximately +4% or so, but we have
all gotten more grey hair in the process.
In my previous career, I was a research analyst, investment
strategist and permanent member of Bear Stearns' stock
selection committee. In that regard, the transition has
not been difficult, although technically there is a difference
that a significant portion of my net worth is now invested
- How has the recent increase in market volatility affected
the Fund's portfolio management and performance?
We made a decision from early on that we are not going
to make any bet on the war. The point of investing is
to make educated predictions-but the number of exogenous
variables being generated makes it unusually risky to
approach the markets in an educated or rational manner.
In addition, when every single participant in financial
markets is fixated on an event, then there is no opportunity
left in it. We do have the option of not batting pitches
we don't like.
However, we have been fighting a guerilla war of our
own. We are looking at situations that markets are not
focusing on. We are taking advantage of inefficiency and
mis-pricing that have resulted from market participants
being too focused on the war.
The net result is that our portfolio is far less volatile
than markets, and we are perfectly happy that way.
The Fund did quite well in the first two months of
2003 (+3.71%); what themes have worked well for the Fund?
What themes do you envision to be profitable for the 2Q
On the long side, we have been focusing primarily on
growth in Asian domestic demand. China is the only game
in town for now. Just this year, a few stocks in this
context contributed to nearly all of our gains. We do
not know what might or might not work out in the 2Q per
se but believe this trend will have some longevity.
- What are some of your pertinent Macro views and from
these how are you currently "balancing" the portfolio?
We do not believe the outlook for global economy is
rosy. In fact, the probability of a recession in the US
increases by the day. Oil price is a critical variable
in this context. Even if oil prices were to fall another
6-8 dollars from here, we suspect that the damage to global
economies may already be done. We are also cognizant that
US and European markets are in a structural decline and
even the most favourable outcome to the war may not do
anything to address structural overcapacity and credit
issues. The upshot for the global economy is when major
central banks initiate quantitative easing or inflation
targeting. But doing so may lead to major dislocations
in the world currency market.
The occurrence of strong bear rallies is probable. Japan
had three rallies exceeding 50% in magnitude over the
course of 14 years when the market lost some 80% of its
The critical issue for investing in Asia is the extent
of each market's correlation with each other and with
the US and Europe. Our primary objective is to reduce,
if not completely eliminate, such correlation in our portfolio.
Putting a high beta position on to ride a wave has never
been our cup of tea. Instead, we believe that the best
way to make money in difficult markets is by not losing
We are trying to take advantage of extreme valuations
created by volatility and aim to possess an adequate level
of resources to do so.
- Generally, in what countries do you find the most
interesting companies based on inherent franchise value?
When we pick stocks, our focus is not franchise value
per se, but rather the change in franchise value, or the
delta. A good company can have a bad stock, and vice versa.
We are much more interested in the 1st and 2nd derivative.
Asia is never short of change, and therefore I am perpetually
optimistic that there is money to be made. A positive
economic event may have the completely opposite effect
on companies' bottom lines, such as market liberalisation.
In other words, micro and macro views may from time to
time conflict with each other. This is what makes the
business of investing in Asia challenging and interesting.
What are your current views on the investment environment
The only notable exception is Japan, where things are
slow to change. As the second largest economy in the world,
Japan has to be looked at within the context of the global
economy, especially given its large export sector. The
ultimate solution for Japan to get out of its current
malaise is quantitative easing and nationalisation of
its major banks. This will be a very drastic thing to
do, but where we do not perceive change, we do not invest.
- Views on Korea?
From a macro perspective, Korea is in a tight situation.
North Korea has overplayed its hand in this nuclear row.
If the war goes well in Iraq, North Korea may well become
the next focus of the Bush administration. If the war
goes badly, the Kospi certainly will not do well either.
We think Korea is caught in a bind as far as risk/reward
is concerned. Of course, the stocks are very cheap.
- A number of managers have lamented the lack of liquidity
in the market over the past four months. Has this fall in
liquidity changed your investment process at all?
Liquidity has indeed eroded, but the fall is incremental
and not drastic. We are very sensitive to this issue and
our policy is generally to limit our position size to
no more than several times a stock's average daily volume.
So far, liquidity has not been a problem for us but I
can imagine it being a major issue for larger funds.
- Has the Fund been involved in any arbitrage trades
since launch (June 2002)? Have they been beneficial to the
We have engaged in arbitrage in a limited manner and
its contribution is small. The overriding reason for this
is that when many parties participate in an arbitrage
trade, profits evaporate. Another problem with arbitrage
is that we can never effectively compete with brokers'
proprietary books in this product as their cost of transaction
is free. We are only occasionally interested in such opportunities
when we feel investors' attention is fixated on other
parts of the market.
- Do you have any plans to visit the United States and/or
Europe in the coming months in order to raise capital for
I am planning to be in the United States in the next