Hedge Fund Interview with Kai Jiang, Portfolio Manager and Director of ChinaFund Cayman (previously known as DragonFund)

ChinaFund Cayman Ltd, a limited exempted company organised under the laws of the Cayman Islands, is a private hedge fund with offices in Chicago and Shanghai. Previously known as DragonFund LP, it has a track record of more than ten years of trading.

The fund invests globally with a special focus on Chinese ADRs and Hong Kong shares as well as US equities with significant assets, investments, production activities, trading or other business interests in China, or which derive a significant part of their revenue from China.

It currently manages assets of US$90 million.

Kai Jiang graduated from the University of Illinois with a degree in finance. As a student he developed the basic model for his investment strategy utilised today. After graduation, Archer Daniels Midland recruited him into their executive training programme to prepare him to operate in the Asian commodities market.

Prior to founding DragonFund LP, Jiang was an investment executive at UBS where he refined his model and developed a highly effective short-term trading strategy.

  1. The equity markets in China have had a rough year so far, amid some natural calamities within the region, coupled with a marked slowdown in exports (particularly to the West). The Shanghai Composite Index shed 54% for 2008 year-to-August, despite which the ChinaFund returned a staggering 64% over the same period. How do you explain this commendable outperformance of over 100%?

    There are several reasons why ChinaFund Cayman Ltd was able to perform in spite of a negative market environment. In contrast to many other funds investing in the China region, ChinaFund has no long bias and employs a hedging strategy through the use of options and future contracts. Due to the short- to medium-term trading strategy employed, the fund is able to lock in short-term gains quickly and liquidate positions in a matter of minutes if the market moves against us. ChinaFund invests exclusively in large-cap companies, indices and ETFs to ensure the availability of necessary liquidity. Another aspect is the more technical-driven strategy which works better during volatile market conditions in contrast to a more value-driven fundamental approach adopted by our peers.

  2. Could you tell us about the regional diversification of your fund's portfolio? Do you invest only across mainland China or do you also invest in other countries?

    Besides Hong Kong, ChinaFund also invests in the US market with a special focus on Chinese companies listed on Nasdaq and NYSE. The advantages of trading Chinese US-listed companies are the strict accounting practices, ample shorting and hedging possibilities, a mature option market and high liquidity. Additionally the fund invests in Taiwan and Nikkei index futures for diversification purposes.

    The fund does not invest in Shanghai- or Shenzhen-listed shares due to the limited hedging possibilities, the absence of an equity option market, the high valuations and the frequent and sudden government interventions.

  3. How flexible is your fund in terms of its sectoral diversification? Do you have any cap or restrictions in place in terms of your exposure to each sector?

    Our daily research routine involves the technical analysis of more than 100 different sectors and financial instruments including currencies and commodities. We invest in sectors in which we have the most fundamental expertise and which can also be identified as the Chinese mega markets for the future. Those sectors include technology, Internet, telecommunication, travel and leisure, gaming, green energy and media.

  4. What sort of fundamental/technical analysis do you perform on the underlying markets prior to making an investment? Do you also use any electronic models for your analysis?

    Short-term trades (up to two weeks holding period) are 70% technical and 30% fundamentally based. Investments mainly involve index future contracts, liquid index and sector ETFs. Medium-term trades (holding period up to four months) are based on a 70% fundamental research and a 30% technical input. Traded instruments are mainly equity stocks hedged with corresponding options, usually with a 4-week duration. ChinaFund employs a discretionary technical trading model which has been used and refined for over ten years.

  5. What portion of your research/analytical process do you depend on your model for? Did the recent turbulence in the underlying markets over the past year impact the working of your model? Furthermore, did you or your team have to intervene in the functioning of the model during that time?

    The technical model is an important tool to guide us through the daily allocation process. The model needs to be tweaked according to market conditions. An example would be the vast increase of volatility which forces us to takes gains and losses quicker and shorten the overall holding period of our assets. Also the overall net exposure needs to be adjusted more frequently.

  6. On an average, how diluted or concentrated is your portfolio in terms of the number of stocks you invest in?

    We do not manage portfolios with a large amount of stocks. In general we invest in about 15 to 20 instruments, including ETFs and indices, which are already diversified in nature.

  7. How much leverage do you use for your fund? And, what ratio of long to short positions do you usually maintain for your holdings? Have you been short-biased over the recent past?

    Do to the higher volatility we have not been leveraging the portfolio for the majority of the year. The highest employed leverage was 130%. Due to the fact the fund trades very frequently, the direction of the portfolio changes on an ongoing basis. We do not formulate a specific ratio of short to long positions as it depends on the current market conditions. The fund has been short-biased for selected weeks.

  8. Could you shed some light on how you manage risks for your fund's investments during different market conditions? Has your risk management been more stringent over recent times, owing to the high volatility across equity markets?

    We introduced certain measures to counter excess risk – no or only minimal leverage; investment in large-cap companies and very liquid financial instruments only; hedging through options and futures; ongoing analysis; and fast liquidation of poorly performing investments.

  9. What are the different classes of investors that your investor base currently comprises of? Which class is your fund best suited for in terms of its risk/return profile?

    As we are an emerging market hedge fund, the investment has to be considered as high risk. Only investors who fully understand the underlying risks and chances of such an investment should pursue an investment in ChinaFund. The current investor base is comprised of FoFs, a family office and HNW individuals.

  10. Could you give us your near- to medium-term outlook of the equity markets in China? Do you foresee any favourable trends taking shape in the near future, given relatively low valuations (compared to the last year) across the region?

    We believe that the volatile market environment will prevail for some time. Although the government introduced numerous interventions and aid packages, the negative trend is not broken. We are anticipating weak economic data (such as weak job reports and weak export data) and shocks to the global economy to follow and an increasing indebtedness of US and European governments and consumers. China will not be able to isolate itself from these global problems. There might be short-term rallies over the next few weeks but the overall trend looks very weak.

Contact Details
David Taborsky
ChinaFund Cayman Ltd
+86 21 6288 6790