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Hedge Fund Up 3,000% in 5 Years Can’t Get Enough China Stocks

Concerns about Russia’s invasion of Ukraine and rising Covid cases are weighing on Chinese stocks, but a local hedge fund that has risen nearly 30 times in the last five years by focusing on undervalued stocks is ready to jump in.

Guangdong Zhengyuan Private Fund Investment Management Co., whose assets have increased fivefold since the beginning of the year to around 14 billion yuan ($2.2 billion), plans to raise money again next month as stock valuations become more appealing, according to founder and fund manager Liao Maolin.

“With the market having fallen to this level, there are so many stocks that I want to buy now, but we have no more money,” he said in a March 8 phone interview from Guangzhou, where the company is based.

While that may appear to be a risky bet, Liao’s funds have returned a whopping 2,944 percent since 2017, topping the five-year rankings for stock hedge funds at Shenzhen PaiPaiWang Investment & Management Co.

His reasoning is straightforward: all the doom and gloom out there, from the war in Ukraine to monetary tightening in the United States and domestic economic headwinds, reinforces the possibility that policymakers will refrain from pricking more bubbles and instead move faster to spur encouraged areas such as new infrastructure and digital transformation.

“Everything you see this year could be bad news and uncertainty, but the government will almost certainly take counter-cyclical measures,” Liao, 37, predicted. “The bad news you’re seeing has been mostly priced in, and we’re likely to see more unexpected policy support down the road.”

His remarks were confirmed last week when Beijing pledged to stabilize markets, triggering the largest two-day rally in Chinese stocks since 1998. Policymakers are now expected to ease monetary policy and ease restrictions on the technology and real estate industries.

Liao prefers middle- and downstream firms in emerging strategic industries such as batteries and new-energy vehicle parts, he said, without naming specific targets. According to Liao, such companies that are currently suffering from soaring raw material costs will only benefit when commodity prices eventually fall.

Zhengyuan has avoided “land mines” ranging from real estate developers to internet platforms, which have imposed massive losses on investors in the last two years, by sticking to areas supported by the government and avoiding those in the crosshairs of regulators.

For the same reason, the company has avoided once-hot stocks such as liquor makers, which mutual funds were heavily invested in, as well as gaming industry shares, which could perform well.

‘Positive Energy’

“What we buy is full of positive energy — we walk in the sun,” Liao explained. “As a result, it’s very unlikely that we’ll step on any policy or ethical landmines.”

The firm’s Zhengyuan No. 1 fund, which manages more than a billion yuan, gained more than 160 percent last year by focusing on upstream plays such as rare earth, industrial silicon, and raw materials for new-energy vehicles – areas that benefited from the local economy’s recovery from the pandemic’s early stages.

This year, Liao stated that he will concentrate his efforts on downstream firms in industries such as new energy infrastructure such as charging piles for electric vehicles, database construction, information security, and environmental protection. He believes that depressed valuations caused by high costs will translate into profits when their performance improves. “Clearly, the surge in commodity prices cannot be sustained,” he said.

When tensions in Ukraine rose ahead of Russia’s invasion, Zhengyuan increased its photovoltaic holdings in the expectation that higher costs of traditional energy such as natural gas would fuel demand for solar power in Europe, according to Liao, who declined to provide specifics. According to him, such investments returned about 40% last year.

Zhengyuan seeks undervalued stocks that are expected to show significant improvements within a year in order to attract other investors, giving it opportunities to profit, according to Liao. It borrows with leverage of less than 30% but does not short.

While stock prices and economic growth fluctuate, choosing the right industries and companies is the key to long-term returns at Zhengyuan.

“These days, the structure is very important,” Liao said. “It feels good every time when you get it right.” When you get it wrong, it can be extremely painful.”


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Kathy Lewis

Kathy Lewis is an all-around geek who loves learning new stuff every day. With a background in computer science and a passion for writing, she loves writing for almost all the sections of Editorials99.

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