J Flag Investment

Hisashi Osezawa, CIO and CEO, J Flag Investment

Can you tell us a bit about J Flag Investment?

J Flag, established in May 2009, is a registered investment advisor based in Tokyo. We specialise in the Japanese small cap equity space and manage both long only and long/short strategies. Our current AUM is around US$80 million. We have a broad client base consisting of retail and institutional investors. The core members of our team are ex-JP Morgan Asset Management colleagues.

What is your own background?

I have over 20 years’ experience in asset management and have been managing Japanese equity products for 14 years. Prior to establishing J Flag, I was managing director and senior portfolio manager of the JF Japan Portfolio Group at JP Morgan Asset Management.

Describe your investment strategy and why it differs from what other fund managers are doing.
Our strategy is based on rigorous fundamental research. We believe that the market is inefficient and with a rigorous bottom-up research effort, we can extract superior returns especially in the mid- and small-cap sector. We believe that our investment experience in this space in combination with our extensive research effort can produce an information advantage over our peers. We focus
on finding stocks that could grow five or ten times and believe that this approach could be effective in protecting the principal as well. In order to reduce the risk of drawdown and to determine the investment opportunity, we also look into the macroeconomic environment and market and sector trends.

What investment themes in Asia do you see as the most attractive at the moment?

The Japanese mid- and small-cap equity space. Valuation is simply just too cheap and unreasonable. From various indicators we are assessing indications that the market will start to turn around.

How has your approach to risk management changed in recent times?
Our risk management approach has not changed. In principle, if there is a situation where we cannot properly predict possible outcomes we simply tend to get out of the market.

Do you see changes in regulation as a threat or an opportunity?

We believe that there is no impact on us.

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
We believe that all these perceptions are cyclical. Asia will always provide unique and attractive investment opportunities.

How did the major disasters in Japan in March impact your portfolio?

Our long bias portfolio had big drawdown at that time, though we reduced long exposure immediately after the earth quake to protect AUM. I think that liquidating the portfolio after the earthquake was an absolutely prudent investment decision. Basically, the impact of the earthquake itself was something that I could have dealt with but the impact of the nuclear disaster was a situation that was unpredictable.

What would you have done if you hadn’t been a fund manager?

Maybe I would have been a store manager of fastfood restaurant chain Sukiya but definitely not its competitor Yoshinoya.

(Oct 2011)

Samuel Choi, CEO, Elmore Capital

Can you tell us a bit about Elmore Capital?
Elmore is an independent investment manager in Hong Kong founded in 2009. Our ambition is to be a regional player, creating a Hong Kong based platform for managers covering the regional and global markets. Chris Ni, senior portfolio manager, currently manages an Asian Multi-Strategy Alpha Fund – Elmore AMSA Fund Limited comprising three independently managed strategies, namely an Asian focused equity strategy (AES), an Asian focused currencystrategy, and a commodity strategy. Elmore is launching the AES as a standalone fund because of the excellent returns that it has produced up to 2011 July, (+12.7% YTD, 20.0% in 2010, and +38.5% since
inception with a standard deviation of only 11.9%). Elmore has managed the AMSA Fund and thus the AES since August 2009. The underlying strategies and models for the AMSA Fund and the AES had originally been created and also managed by Chris within Shin Kong Life, an Asian life insurance company.

Describe your investment strategy and why it differs from what other fund managers are doing.
The fund management team adopts proprietary trading and risk management models to apply economic and behavioral-based quantitative filters and qualitative views to invest on a market neutral basis. The AMSA Fund seeks alpha from the three uncorrelated assets and strategies. In particular, the Asian Equity Strategy generates alpha by adopting bottom-up multi-factor
quantitative stock selection processes, utilising quantitative filters and judgmental factor weightings, in conjunction with risk management processes aiming to limit downside volatility.

What investment themes in Asia do you see as the most attractive at the moment?
Despite the recent high volatility in various Asian markets, we continue to find the market neutral approach very successful in generating consistent returns. We succeed in generating alpha from  our Asian Equity Strategy’s proprietary models, particularly Australia and Malaysia.

How has your approach to risk management changed in recent times?
Our risk management approach has stayed more or less the same. We adopt prudent risk approach and focus very much on downside risk protection, with maximum monthly drawdown of less than 3.4% and 2.9% while annualised standard deviation (rolling 12 months) of 7.2% and 11.9% respectively, for the AMSA Fund and the AES since inception. That is achieved by our market neutral approach, investing in highly liquid instruments, and diversification in assets, and across countries, sectors, products, or positions. We monitor limits, e.g. in CVaR, trade positions, or drawdown, on a daily basis.

Do you see changes in regulation as a threat or an opportunity?
As an emerging manager, we see the new regulations as additional cost burdens. The potential marginal benefit to Elmore and its investors seem to be outweighed by the potential cost at this stage.

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
Although the market has recently seen a return of allocations to emerging managers driven by performance, we find branding is a major focus for many investors subsequent to the financial tsunami. Accordingly, in the near future, the increase in allocation by Asian investors will probably
benefit most those managers (Asian or global) with “brands” as individuals or firms.

Why have you chosen to operate from Hong Kong?
Hong Kong provides the optimal balance of location, legal and financial infrastructure, access to investors, and growth opportunities in Asia for Elmore.

What would you have done if you hadn’t been a fund manager?
Not an option for Elmore at the moment.

(Sep 2011)

Marvin Kelly, Founder and Portfolio Manager, Quaternion Capital Management

 
Can you tell us a bit about Quaternion Capital Management?
Quaternion is a fund I co-founded in January this year after leaving Credit Suisse’s proprietary
trading group. Its focus is developing market-neutral quantitative strategies, primarily for global
equities and futures.

Describe your investment strategy and why it differs from what other fund managers are doing.
Our primary area of interest is statistical arbitrage, where we have an edge as a result of extensive research and trading experience across all major markets for the last 11 years. Instead of relying on a single model or approach, we employ a variety of methods to identify and develop a portfolio
of strategies based on diverse methods and signals to reduce risk. We also address trading at multiple time frames, from longer-term valuation and stock-selection to short-term execution.

What investment themes in Asia do you see as the most attractive at the moment?
One particular theme is “will Japan finally begin to recover?” This question has been asked many times in the last 20 years, and each time of course the answer has been “not yet”. If the Japanese economy can finally escape from deflation and the equity market does exhibit some strength and garner more interest from international investors, it will be beneficial to a variety of strategies there. Most quant strategies are beta-neutral and not dependent on market direction but they all benefit from increased flows and investor participation.

Has your approach to risk management changed in recent times?
With financial crises occurring every 9-12 months we have become more conscious of the effects of the macro environment on quantitative trading and the ways in which we can use risk measures and factor dynamics to characterize particular regimes. In the “good old days”, like 2009, it was enough to intelligently buy into underperformance across the board but it’s nowhere nearly that simple today.

Do you see changes in regulation as a threat or an opportunity?
New regulations passed to encourage fair and liquid markets expand the opportunity set; those passed as a result of fear, such as the recent short-selling bans, reduce it and have no real benefits to any market participants.

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
Large fund managers have received the bulk of new inflows recently partly because of investor familiarity and the issues concerning due diligence in the post-Madoff environment. This trend will hopefully slow down a bit as investors seek higher returns from local funds which are less capacity-constrained but this will require a pickup in general risk appetite which is probably not on the horizon right now.

What is the biggest difference between your old gig as an investment bank prop trader and now running your own shop?

The benefits of being at a new firm include the ability to move quickly into new markets or strategies and better control of technology decisions which are important for quantitative trading. As a prop trader at CS a lot of the basic business functions were well handled by the firm’s support teams but the bank was less nimble in areas such as software development.

Why did you choose Hong Kong as a base?
I have lived and traded in New York, London, and Tokyo but Hong Kong beats all three in terms of a business-friendly environment and a convenient, modern infrastructure. It also has a good regulatory system and is attracting an expanding talent pool which bodes well for the future of fund management here. The “through-train” of capital from China has been slow to develop but is becoming more open which will also benefit HK.

What would you have done if you hadn’t been a fund manager?
I’d start a rock and roll band.

(Sep 2011)

Max Gottschalk, Co-Founder and Head of Asia Pacific, Gottex Fund Management

Can you tell us a bit about Gottex?
Gottex Fund Management is a global alternative asset management and advisory firm. Founded in 1992, Gottex has US$8.9 billion in total fee-earning assets as at 30 June 2011. We offer a variety of investment products and related services to institutional investors across the world. We employ 109 professionals, including over 30 investment professionals, in six offices located across three continents. This allows us to combine in-depth local knowledge of financial markets and investors with the strength of a global presence and infrastructure.

What is your own background?
I joined Gottex in 1998 and co-founded its fund of hedge fund business. I am a member of Gottex’s management and investment committee and currently run Gottex’s Asia business. Prior to Gottex, I worked at Bear Stearns & Co in New York where I was responsible for looking after hedge funds on the fixed income derivatives desk. I have a business degree from the University of Virginia and was part of the junior Swiss ski team having been brought up in Switzerland.

Describe your investment strategy and why it differs from what other fund managers are doing.
Our products are principally focused on relative value and arbitrage strategies leveraging our deep bench of investment professionals who have come from various trading and prop desks on Wall Street. We have designed products that exhibit low correlations with traditional markets which meet the need of our institutional clients that are looking to diversify from equities and bonds. We differ in that we don’t invest in managers that take outright directional bets and therefore limit ourselves to a smaller part of the hedge fund universe.

How has Gottex’s approach to risk management changed in recent times?
We always had a strong emphasis on risk management coming from a trading background. We have been developing our own tools for risk management for over a decade now and believe that we have a very unique approach to looking at risk in our industry which enable us to monitor most of our hedge fund investments on a real-time basis and to be proactive in our portfolio construction/management. We always look at ways to improve our risk system and have made a number of improvements since the crisis. A key change to our investment approach since the crisis has been the increased use of hedge fund managed accounts, which provides us with far greater control and transparency over our investments.

Do you see changes in regulation as a threat or an opportunity?
Regulations increases the barriers to entry and are aimed at protecting investors and markets. So although it may require adjustments and additional disclosure and expenditures, I believe that regulation will be good for our industry medium to long term as it should give investors greater
comfort in investing in hedge funds.

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
Asian’s investors as a whole are still under allocated to alternatives compared to their US and European counterparts which offers some interesting fund raising opportunities for global managers like Gottex. We also see an increased level of interest by foreign investors looking for Asia-based investments. I believe that a large portion of assets raised out of Asia will be allocated to global products.

Why did you recently choose to relocate to Hong Kong?
The world’s economic engine is in Asia and I believe it offers firms like Gottex great opportunities to expand as the asset management industry grows and become more mature. Hong Kong is strategically well positioned, business friendly and offers easy access to the region.

What would you have done if you hadn’t been working in a fund management company?
It’s a difficult question as I have been passionate about the investment management industry since I was a kid. I have always been intrigued by the way the world works and economics. I am also an avid sportsman and music lover and could have very easily pursued careers there, but finance was my vocation.
(Aug 2011)

Yhu Kuni, Fund Manager, Stats Investment Management

Can you tell us a bit about Stats Investment Management?
Stats Investment Management is an independent boutique investment manager in Tokyo founded in 2005. Our mission is to provide unique alternative investment products designed to provide
stable positive returns and match demands from various institutions such as pension funds, family offices, financial institutions, fund of funds and corporate clients. The team consists of 11 skilled professionals who have previously worked at major foreign and domestic financial institutions in Tokyo. Our main investment strategy, Ginga Service Sector Fund, has consistently performed double digit annualised returns since inception in 2006. Performance for all years has been positive. The fund was nominated for the Best Japan Hedge Fund category in the 2009 Asian Hedge Awards and the Japan category in the 2010 AsiaHedge Awards. The strategy is managed by Toru Hashizume, CIO. Prior to Stats, Hashizume managed Japanese investment trusts including their flagship active equity fund as a Chief Portfolio Manager at Mitsubishi UFJ Asset Management for 9 years, and earlier was a sell-side analyst at Yamaichi Research Institute (research arm of the brokerage) for 7 years.

Describe your investment strategy and why it differs from what other fund managers are doing.
As the name implies, the fund is a sector focus fund heavily invested in IT-oriented service industries in Japan. We believe the investment universe is populated with rich alpha opportunities due to the highly competitive business environment with rapid developments constantly changing the industry picture. By continuously, regularly and constantly focusing research on these sectors, we believe we can identify individual mispricing opportunities arising from frequent valuation gaps and earnings volatility earlier than other market participants. We believe our accumulated research efforts and investment experience in this field is our competitive edge in providing unique uncorrelated returns to investors.

What investment themes in Asia do you see as the most attractive at the moment?
Within Japan, the current investment environment has been largely influenced by external factors and global macro uncertainties. This may sound negative for stock pickers but as this environment
also provides volatility, we can pick up individual mispricings from an abundant pool of selections based on medium-term fundamentals and aim to reap large alpha returns going forward.

How has your approach to risk management changed in recent times?
In addition to our regular weekly risk management meetings, we hold daily meetings in times of major macro events such as the most recent East-Japan earthquake. Not only do we closely monitor the risk measures and discuss the portfolio risk levels to protect capital and minimise downside but we are also focused on repositioning the portfolio to maximise the potential alpha returns as the market gradually returns to normal conditions. We believe proper portfolio risk management has been one of our strong points for offering stable alpha returns regardless of market situation.

Do you see changes in regulation as a threat or an opportunity?
As the Japanese hedge fund industry is still developing, whether regulation may stimulate or restrict growth would be seen in the medium-term.

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
We certainly would like to see investors select Japanese fund managers based on skill and results regardless of company AUM.

What impact did the March disasters in Japan have on your business?
After the East-Japan earthquake on Friday 11th March, we quickly reduced the portfolio’s gross and net exposures on the following Monday in light of the many unforeseeable risks at the time.
We believe a combination of the quick reaction and rebalancing efforts in the second half minimised our monthly loss. We have received positive feedback from investors for our transparency and detailed information updates and have since then continued business as
usual.

What would you have done if you hadn’t been a fund manager?
Perhaps something completely unrelated, like opening a ramen shop.

(Aug 2011)

Stephen Satchell, Managing Partner, GCS Capital Management

Can you tell us a bit about GCS Capital Management?
GCS Capital Management is a Singapore-based investment advisor that was founded in 2009. The firm manages　private investment funds across the credit, special situations, and illiquid　investment markets of Asia, with a particular focus on private lending　transactions and leveraged issuers. GCS Capital Management currently　manages two funds with an excess of $US50 million of assets under management.

What is your own background?
Prior to establishing GCS Capital, I was the head of the　proprietary credit trading business in Asia for Credit Suisse.

Describe your investment strategy and why it differs from　what other fund managers are doing.
The investment strategy is credit and the niche is special　situations and private lending. What differentiates GCS from most other credit managers is its focus on the illiquid section of the market.
Investors in almost all asset classes (credit, equity, commodities, etc.) are strongly skewed toward the liquid part of the market. This presents opportunities for those willing to enter into transactions that are not as liquid as public bonds. For borrowers who are tapping thimarket, they are paying a massive premium relative to risk. The goal is to be significantly overpaid to do illiquid transactions.

What investment themes in Asia do you see as the most　attractive at the moment?
Asia will be driven by two factors: the ongoing slumps in　Europe and the US combined with medium term outlook for a slowdown of growth in China (soft vs. hard landing).

How has your approach to risk management changed in recenttimes?
In our case, not that much. As an investor in illiquid transactions, as has always been the case, almost all risk management comes to bear prior to entering a transaction.

Do you see changes in regulation as a threat or an opportunity?
We just see it as a cost. Increased regulation and therefore increased costs are a given. Larger firms will obviously be able to spread these costs over a larger AUM base. As a firm that will always
look to stay relatively small, increased regulation is just a known cost for the future.

Fundraising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will big global fund managers get most of the assets?
As the number and quality of Asian investment managers increase, I see them taking a larger proportion of allocations from Asian investors (relative to the past). However, the large global
institutions will always get the bulk as they can provide stability over returns.

Why have you chosen to operate from Singapore?
GCS Capital chose Singapore for three reasons. As our due diligence process requires on-site analysis, Singapore is great as it is centrally located to the markets where we transact the most
(Australia, Indonesia, India, and China). It is a base for the originators and structurers of the deals that we enter into, so meeting with people is easy. And Singapore has an efficient business and regulatory environment for investment advisors.

What would you have done if you hadn’t been a fund manager?
If some university would take me, I would have liked to have been a university history professor.

(Aug 2011)

Alexander Ries, Founder and Managing Director, Bamboo Capital

Can you tell us a bit about Bamboo Capital?
Bamboo Capital is a CTA/managed futures type of hedge fund management company. We trade futures and liquid foreign exchange markets. We develop our own models to identify and exploit
patterns and trends in the prices of the instruments we trade.

Describe your investment strategy and why it differs from what other fund managers are doing?
The large majority of fund companies in Asia are discretionary long/short equity funds. Firstly, as mentioned above, our investing universe comprises the most liquid commodity and financial futures, not equities. Secondly, we are not discretionary but use quantitative models in a systematic way. For example, 80% of our models are trend following in nature, so if our investors see the price of gold go from $1,000 to $1,600 they know we will have taken a big chunk out of that move.

What investment themes in Asia do you see as the most attractive at the moment?
Although we trade Asian equity index and commodity futures, we do not have a specifically Asian focus.

How has your approach to risk management changed in recent times?
Our approach has not changed. Just as we use models to identify trading opportunities, our market risk is also managed by systematic models. These models adapt to market conditions and performed as they were designed to do, for example during the recent earthquake in Japan. However since 2008 we are more aware of counterparty risk, although given the universe of instruments we trade, we only have to worry about our broker, cash custodian and exchanges.

Do you see regulation as a threat or an opportunity?
A threat. Unless one is in the business of regulatory arbitrage, compliance with extra regulation is nothing but a direct cost with no benefit, although we agree with the new MAS requirement for an
independent fund administrator/custodian/auditor setup to avoid Madoff situations.

Fund raising in Asia: as Asian investors increase their hedge fund allocations, do you think Asian managers will start to benefit more or will global fund managers get most of the assets?
With brand consciousness such an important factor in Asia, this is not an easy environment for a small hedge fund. Global fund managers and large Asian companies will benefit most.

Why have you chosen to operate from Singapore?
A) Because the market was new and the strategy used by Bamboo Capital was under represented here and so we felt there was an opportunity.

B) Because the regulatory and business environment were very conducive.

C) For personal reasons.

What would you have done if you hadn’t been a fund manager?
Become one.

(Aug 2011)

Atsuhiro Mori, Chief Trader, Orix Investment Corporation

Can you tell us a bit about the trading group at Orix Investment Corporation?

We are four members in the trading/portfolio management group. We design and develop our own trading systems for mid- to long-term trend-following and diversified. We had been trading in managed accounts by ourselves mainly for US CPOs and prop funds since 1995 and now we mainly do trading advised by daily signals generated from our proprietary trading systems for GCI Investment Management in Singapore, who is the investment manager of the Orix Commodities Fund since June 2010. I am chief trader and portfolio manager with 15 years’ experience as a CTA. There are two senior traders including me who mainly design and develop trading systems and do research. Additionally we have an associate trader doing research and an associate for trading systems operation and administration.

You joined Orix early in your career and trained with Commodities Corporation in the US in the early 1990s – what has that experience meant for you?

I leaned a lot about trading from Commodities Corporation (CC) in the 1990s. CC was a pioneer in CTA and futures trading and it has much know-how about developing successful trading. CC’s philosophy is to allocate to a trader in the early stage of his career. CC had the Trader Evaluation Program; a training program for associate traders. It included mathematical evaluation (ROR, drawdown allocation, etc) but also evaluated traders’ originality, philosophy and consistency. When I was an associate trader, I could develop my original trading systems. There were plenty of infrastructure and resources (library, data and technology) available and good incentive fees for senior traders. In 1994 there were over 20 associate traders when I was at CC. We exchanged trading ideas and helped each other’s development at CC. There were also a few trader mentors. We could ask them about anything we wanted. Independent traders and other famous persons sometimes visited CC and held lectures for associates. CC tried to create the best environment so that associate traders like me could concentrate on their own trading and development. I liked CC in the 1990s very much and I still have many relationships with old CC people.

Describe your investment strategy and why it differs from what other fund managers are doing.

We are a CTA/managed futures manager. Our trading style is medium-term trend-following, systematic and diversified. Our portfolio has lots of Asia/Japan instruments (currently 25% on average). We have 15 years’ experience and good and long-established relationships with local brokers in Asia/Japan. We may limit allocation if we judge that our best diversification with Asia/Japan or other small markets will be difficult. Our target is the early stage in a trend. We diversify with several trading models. They are designed to be uncorrelated to each other in difficult periods for typical trend-followers. However they are correlated and all profitable during many strongly trending periods. The drawdown from the peak of a trend is expected be smaller than many other long-term trend-following methods.

What investment themes in the commodities space do you see as the most attractive at the moment?

The commodity markets are becoming more popular markets for many investors. Some commodities sometimes is “financialised” and move not by its own fundamentals or supply/demand concerns. In this meaning, some of them may become more volatile. But we are consistent; following the trend if it is up or down. Our investment theme is better diversification and to follow the trends.

How has your approach to risk management changed in recent times?

Our main risk management approach hasn’t been changed in recent times. Our risk management strategy built in the systems has been designed by very long-term and robust simulation. We often check or review our approach but it needs robust results in long-term simulation. We always look for new markets especially in Asia for better diversification.

Do you see changes in regulation as a threat or an opportunity?

The recent Dodd-Frank Act may impact some hedge funds or big trading firms. But in my opinion, CTA is the longest successful strategy in alternative investments. Many CTA strategies are very simple; following trends. And they trade exchange traded futures. It is already very transparent and has enough liquidity. They won’t be influenced much by new regulation. But it will impact big trading firms if they have to open big positions in smaller futures market. Or it will be difficult for them to trade some markets if the position limits become tighter. In Asian markets, some countries are very positive to open new exchanges and new instruments. Many of them try to introduce American style and investor-friendly methods into their trading rules or systems. Some emerging
countries will also be expected to be fully open and operating to global standards. I hope all Japanese stock/commodity exchanges must follow this trend and cooperate together. Hopefully they will be more friendly to investors and be more positive to make Japanese exchanges more appealing to the world.

What would you have done if you hadn’t been a fund manager?

I would be a buy-side institutional investor. It was (and still is) the most probable job for me. Otherwise I was interested in managing a sports team. I would be general manager of a professional soccer or baseball team (Orix has professional baseball team in Japan). Or I want to help many young soccer players to go to European teams too. Like CC, I am good at spotting a good player early in his career and I may be good at selling without serious drawdowns. But maybe
this cannot be done systematically as players are human.

(Aug 2011)

Lionel Semonin, Founder and Managing Director, Four Elements Capital

Philip York, Partner, Gemini Asset Management