Quant Hedge Fund in Asia Finds Opportunity in Iron Ore Sell-Off
Quant Hedge Fund in Asia Finds Opportunity in Iron Ore Sell-Off
(Bloomberg) -- As mining stocks tumble and commodities from iron ore to oil sink toward lows not seen since last year, Legend Arb Asset Management’s Kace Lam sees an opportunity.
Lam, managing director of the investment unit of Hong Kong-based Legend Arb Trading Co., plans to start a quantitative hedge fund focusing on iron ore. The Legend Arb CT Equity Fund, set to open this month, will rely on mathematical models and fundamental analysis to make bets that take advantage of short-term price dislocations between iron ore futures and mining stocks in China, Australia and Brazil.
“China is the main driver of commodity prices, and they have more and more power in iron ore futures prices. They’re pushing the prices in an extreme way and the volatility is high,” Lam said in an interview in Hong Kong. “In the coming years, we see lots of opportunity for price inefficiency in iron ore futures and mining stocks.”
Iron ore, which benefited last year and in the first quarter of 2017 from credit-and-infrastructure spending in China, sank into a bear market in April amid concerns supplies are rising just as China’s mills enter a weaker period for demand. Futures have remained under pressure as concern builds about the outlook for rising supply and China’s clampdown on leverage ripples through markets.
The commodity’s decline has hurt miners, sending shares of Fortescue Metals Group Ltd., Rio Tinto Plc and BHP Billiton Ltd. tumbling this year. With stockpiles at ports in China -- the world’s largest buyer of iron ore -- near a record after robust shipments from Australia and Brazil, BHP Billiton, the world’s largest mining company, cited the inventories as among risk factors that may tug prices lower.
In Asia, 10 hedge funds focused on commodities have reported data for 2017, according to Mohammad Hassan, head of hedge fund research at Singapore-based data provider Eurekahedge. Eurekahedge’s Asian Commodity Hedge Funds Index is down 1 percent in the first quarter of 2017, after gaining 11 percent in 2016.
| Year | Eurekahedge Asian Commodities Hedge Fund Index | Eurekahedge Hedge Fund Index |
|---|---|---|
| 2013 | -5.30% | 9.3% |
| 2014 | 10.63% | 4.96% |
| 2015 | -1.07% | 1.96% |
| 2016 | 11.23% | 4.51% |
| 2017 1Q | -1.03% | +2.33% |
The Legend Arb fund will be launched via the fund platform at OP Investment Management, which provides startup managers with office space and infrastructure, and helps with choosing service providers such as lawyers and prime brokers. Hong Kong-based OPIM added 8 hedge funds to its platform in the first quarter of this year, after adding 18 funds in 2016, according to chief executive officer Alvin Fan.
--With assistance from Jasmine Ng
To contact the reporter on this story: Taylor Hall in New York at thall88@bloomberg.net.
To contact the editors responsible for this story: Nathaniel E. Baker at nbaker14@bloomberg.net, Sree Vidya Bhaktavatsalam, Paul Panckhurst