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

1. Coming from an equity research background, what have been the most difficult aspects in running your own hedge fund?

   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 with Horizon.
   

2. 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.
   

3. 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 2003?

   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.
   

4. 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 value.

   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 it.

   We are trying to take advantage of extreme valuations created by volatility and aim to possess an adequate level of resources to do so.
   

5. 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.
   

6. What are your current views on the investment environment in Japan?

   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.
   

7. 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.

8. 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.

9. Has the Fund been involved in any arbitrage trades since launch (June 2002)? Have they been beneficial to the Fund's performance?

   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.

10. Do you have any plans to visit the United States and/or Europe in the coming months in order to raise capital for the Fund?

    I am planning to be in the United States in the next several weeks.