SHANGHAI/SINGAPORE, May 31 (Reuters) - Wang Bo, chief of Shanghai-based hedge fund Jurun Capital, likes to buy cheap and keep a margin of safety in any investment.
Wang's strategy of buying some of the cheapest Chinese domestic junk bonds, a market few people dare to touch, has paid off handsomely, catapulting Jurun to the top of the debt fund league tables.
The 2 billion yuan ($289.35 million) hedge fund founded in 2015 surprised investors with a 76% return last year, becoming one of the top two players among Chinese debt-focused private funds that manage more than 500 million yuan.
That performance is all the more stark because of how fund managers have struggled to make money off yuan-denominated high-yield debt, a niche market dominated by property developers and debilitated by China's long crackdown on the sector.
China high yield strategies run by Fidelity's FIL Investment Management and UBS Asset Management, for example, lost more than 20% last year.
Wang's first tactic is to bet on select names, unlike other private funds or mutual funds that spread their risk by owning a basket of securities.
“If you just spread the risks over a bunch of private real estate companies, you are not diversifying away the sector risk," said Wang, who is also Jurun's chief investment officer.
One such bet was on the bonds of Nanjing High Accurate Drive Equipment Manufacturing Group which were battered because the ultimate parent company Fullshare Holdings was in trouble.
"The company itself was running very well. Funds that were panic-selling were not looking at the fundamentals, but we saw the huge price discrepancy,” said Wang.
LESS RISK, MORE REWARD
The second part of Jurun's strategy is to ensure a high margin of safety or, in other words, a risk-reward skew towards buying bonds cheap enough to be written off without pain and with huge upside.
Jurun’s home-run last year was a bet on a turnaround in chips conglomerate Tsinghua Unigroup Co., which defaulted on its bonds in 2020 and completed a restructuring plan in 2022.
“We bought it at 35 (yuan) in 2020 and held it to maturity when the price returned to 90 (yuan) in 2022, ..and we went quite concentrated on it," Wang said, referring to the bond price in relation to the face value of 100 yuan.
“The risk reward ratio is incredibly important when recession is happening at a global level,” Wang said.
Structural tailwinds, such as the supply and demand asymmetry of China’s nascent high yield space, have helped funds like Jurun.
The supply of bonds yielding over 8% is less than 2 trillion yuan, but demand is 200 billion yuan at best, says Zhu Yangmo, a partner at Hainan Shanze Asset Management, a private fund specializing in high yield bonds.
“It’s a buyer’s market,” Zhu said, referring to how most mutual funds and brokers have stringent rules that force them to dump junk bonds as soon as they get too risky.
Jurun’s investors include other funds, family trusts and high net worth individuals.
Wang says hedge funds shouldn't hope for the same level of returns as in 2022. But his game plan remains the same: he has swapped expensive bonds issued by real estate developers such as CIFI Holdings and Country Garden Holdings for cheaper ones selling at a fifth of face value.
($1 = 6.9121 Chinese yuan renminbi) (Reporting by Li Gu in Shanghai and Vidya Ranganathan in Singapore; Editing by Simon Cameron-Moore)
