This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on Dec 14 - 20, 2015.
Hedge funds have always been perceived as highly risky propositions. As the first licensed boutique fund manager in Malaysia, Malayan Traders Capital founders Devan Linus Rajadurai and Aaron Yew aim to debunk that perception with their low-risk hedge fund, which uses value investing strategies with leverage.
Since the 1990s, hedge funds have been perceived as risky vehicles that can destabilise markets. In September 1992, currency market speculator George Soros earned the title of “the man who broke the Bank of England” when his company’s Quantum Fund made over £1 billion in profit by short-selling the pound. As a result, the British government was forced to withdraw the currency from the European Rate Mechanism.
In recent times, two more notable cases have made headlines — Long Term Capital Management, which almost caused a global financial crisis with its highly leveraged trades in 1998, and Tiger Asia Management LLC, whose founder was banned from trading for four years in 2014 when the management admitted to insider trading and share price manipulation.
Yew explains that there is a whole spectrum of hedge funds around the world, but it is only the highly risky ones that tend to get reported. “The term hedge fund is very broad. In recent times, it has been the risky hedge funds that are reported in the media. Some of them do very well, some of them don’t. But there are safe hedge funds, like us. We are a low-risk hedge fund.”
Devan says hedge funds began as a low-risk strategy in the 1950s. “You have to look at history to see what hedge funds actually mean. Hedge funds started out with a very low-risk strategy in the 1950s.
When investing in stocks, famed investors like Alfred Winslow Jones and George Soros would take on opposing positions to minimise and hedge their risks.
“Buffett Partnership Ltd, which Warren Buffett founded in 1956, was actually a hedge fund that practised value investing. Among his many investments were Geico and Berkshire Hathaway, which he took control of after closing Buffett Partnership. He ran Berkshire like a value hedge fund. Seth Klarman of Baupost Group also runs a value hedge fund in the US. George Soros, on the other hand, runs a macro hedge fund, which is considered high risk.”
Devan says what makes the Malayan Traders Capital Absolute Return Fund a low-risk one is the value investing strategy he employs. This is particularly effective in turbulent times.
“Turbulent times present themselves as an opportunity for us as there is a lot of value out there in the markets. Then, we take a little bit of leverage and start investing in these safe companies for the long term,” he says.
“For example, the weak ringgit and low crude oil prices have resulted in the stock prices of certain companies tanking, so much so they came close to their cash value. They may not be able to get the same profit as last year, but when things recover, they will recover as well. So, we picked up some stocks because of this.”
The fact that both Yew and Devan have made “a sizeable contribution” to the fund means that they have skin in the game and are less likely to take on unnecessary risks. “We are an owner-managed fund; we are not employees,” says Devan.
“A lot of hedge funds in the region don’t have significant capital in their funds. They have so many different strategies, which result in inconsistent performance. But when you have your own money in the fund, you have to think first about how you can protect your capital, and then grow it with the lowest possible risk.”
Although Yew and Devan are considered young in this nascent industry, they are optimistic this will not be a disadvantage when it comes to convincing investors to park their money with them. “We may be young, but our strategy is old. Value investing is a time-tested strategy. I implemented this strategy because of the knowledge passed down from my mother and grandfather. In fact, my mom, who is the chairman of the company, still ensures we implement the philosophy,” says Devan.
Focusing on capital preservation
Malayan Traders Capital Absolute Return Fund is an actively managed global equity hedge fund that uses a bottom-up investing approach. It employs the value investing strategy and invests long term in blue-chip companies around the world. “Currently, it is the only hedge fund in the country,” says Devan.
The fund’s benchmark is Singapore’s Straits Times Index and the MSCI All Country World Index. According to its fact sheet, the fund “does not time markets, engage in momentum trading or rely on market forecasts to deliver high risk-adjusted returns”. It is only available to qualified investors with a minimum investment amount of RM500,000. Those who invest via its Singapore office require a minimum of US$250,000.
The fund currently allocates about 40% of its portfolio in US companies, about 40% in Asia-listed companies and 20% in any opportunities they see. “Specifically, the fund looks at solid global companies that are going to benefit from the Asian growth story. We invest in US companies as many of them have expanded globally and tapped into emerging markets like Asia. Also, they are innovation machines. For example, when we made additional investments in Apple in 2012, the company had yet to launch an Apple store in China,” says Yew.
“The 20% will be in whatever opportunities we see. There was a point in time when we invested in London, then in Australia. That was because we both lived there for more than eight years and know the market very well.”
The fund employs leverage in the form of low-interest US or Singapore dollar-denominated loans (of less than 1%) to invest in these companies to obtain a return. The fund aims to make a return of more than 15% per annum, net of fees. Yew says this strategy is safer than buying into a small-cap company that is very volatile, and has contributed to good returns for the fund.
“It is very similar to property investing. Over the last three years, we have made 20% per annum in US dollar terms. In ringgit terms, we actually doubled our money because the currency weakened,” he adds.
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