Interview with Xiaobo Long, CEO & Managing Director of Cypress House Asset Management Company Limited
Eurekahedge
January 2010
Managed by Cypress House Asset Management Company, the China Dragon Engine Fund employs a long/short equity strategy, investing in Hong Kong markets and Chinese enterprises that are highly related to China's economic growth.
The fund targets sustainable long-term returns by implementing disciplined investment process and rigorous risk management to leverage the investment strategy and dynamic asset allocation methodology. The fund has been listed on Eurekahedge and Asia Hedge as one of the top ten long/short equity funds during 2009.
The China Dragon Engine Fund was up a staggering 130% in 2009 while the Eurekahedge Greater China Long/Short Equities Index has gained 43% over the same time. How would you explain such a commendable outperformance?
Correct investment direction. We covered all the short positions in March 2009 and increased our long positions up to 70% in the second quarter. We expected to see the turning point in March 2009. A lot of stocks offered high safety of margin and the macroeconomics started to recover at that time.
We invested in the right sectors in different market cycles. For example, as the economy struggled during recession, we bought new energy stocks such as BYD Company Limited. As the economy was touching bottom, we allocated to resources, high-tech and real estate sectors which led market rally for a while. We were sensitive to the macroeconomic policy and pick-up stocks benefited the most from the government stimulus plan and the economic structure adjustment policy.
We consistently dug out undervalued stocks of sector-leading companies which have high growth prospects, excellent management team, stable cash flow and outperformance over its peers. Such stocks are long-term holdings representing 60% of the fund’s assets.
Meanwhile, we also looked at some short-term trading opportunities which represented 20% of the fund’s assets. For example, based on the economic recovery cycle – we thought strong cyclical stocks such as real estate and materials stocks would pick up first, so we allocated to these sectors, including steel, non-ferrous metals, real estate and marine transportation companies, at the start of the second quarter,. We held stocks of these sector-leading companies for a short period when they were undervalued and sold them when their market value picked up.
We got the right buying points for underlined stocks and we monitored the performance and the risks of the portfolio on a timely basis. Moreover, we strengthened the in-house risk management throughout the course of the research and investment process, diversified the portfolio with more safety assets in bond and cash and utilised a harder cut loss line for equities.
