Hedge Funds Start to Buy the Dip, Betting on the Virus Stabilizing

(Bloomberg) -- As the Chinese city of Wuhan ended its first week of quarantine, Tribeca Investment Partners portfolio manager John Stover was already betting on a recovery. Skittish investors had dumped Indonesian real estate bonds, so he started scooping those up. Short-dated notes from Chinese developers were next.

“You can pick your own adventure in terms of what you read and how scared you want to get about it,” said Singapore-based Stover, whose firm manages around A$1.9 billion ($1.3 billion). “But risk/reward has looked pretty good over the last couple of weeks.”

For many traders on Wall Street, the rising number of confirmed coronavirus cases has meant a frenzied search for safe havens. But for some hedge funds, it’s an opportunity to pick up a bargain. Several portfolio managers interviewed by Bloomberg are betting the crisis will be averted within months, and followed by government stimulus to spur consumption.

Read more: Chinese Hedge Funds Turn Bullish as Panic Selloff Lowers Prices

Stover started the $50 million Vanda Asia Credit Fund in July after spending more than 12 years at Farallon Capital Management LLC. Despite the outbreak, he’s still getting interest from would-be investors, with annualized gross returns of 12.2% and volatility of 2.1% -- January was his best month to-date.

History Lesson

Predictions of post-viral bounces aren’t based on hunches; Edward Bozaan, managing partner and portfolio manager at Cleargate Capital LLC, runs a long-short hedge fund focused on Europe. He told investors in a letter seen by Bloomberg that markets ended higher in the six to 12 months from the first announcement of previous viral crises, like SARS and Ebola.

“Once the number of cases has peaked and begins to fall, it will probably be an excellent time to add to the sectors hurt the most: travel, cruise companies, entertainment and emerging markets,” he wrote.

Others such as HGI Capital Management LLC are looking to protect from further downside but still exploit any upside opportunity. The fund, backed by real-estate investment firm Harbor Group International LLC, is using options to trade on Carnival Corp., the cruise company that operates the Diamond Princess ship that’s become the biggest center of infections outside of China.

“In many cases, the actual outcome from this unfortunate event will not be as detrimental as the market is pricing,” said David Rosenberg, a portfolio manager at the $350 million hedge fund based in New York. “We believe the market has already priced in most of the downside.”

The fund has been looking at other lodging and cruise brands with exposure to China, too. Names include Marriott Vacations Worldwide Corp., Hyatt Hotels Corp., Royal Caribbean Cruises Ltd., Hilton Worldwide Holdings Inc., and Wyndham Hotels & Resorts Inc.

Luxury Goods

For Texas-based Bowie Capital Management LLC, which runs a $425 million long-biased strategy, it’s another type of exposure -- luxury goods companies like LVMH Moet Hennessy Louis Vuitton SE and Hermes International.

“We see this as not a long-term problem for these companies, however the short run seems like it could really be detrimental to their revenues,” said Cory Whitaker, who founded the firm in 2014. “We think this could be a problem for the year, but not for the decade, and if people overreact we’re happy buyers.”

Golden Pine Asset Management Ltd. oversees about $280 million and manages a Greater China-focused stock hedge fund. Chief Investment Officer She Peng said in a letter to investors Feb. 4 that the outbreak could plateau by early March if Chinese government measures are successful.

Like others, Golden Pine sees the outbreak as a temporary shock to consumption and services in China, changing the rhythm but not direction of the nation’s economic recovery. The firm plans to add cheap, quality stocks, She said.

As stock markets reopened after Lunar New Year on Feb. 3, a net 18.2 billion yuan ($2.6 billion) flowed through the stock connect with Hong Kong, the second highest in the link’s history, Golden Pine noted.

The epidemic has “temporarily disrupted the pace of the market, but doesn’t alter the trend of what we see as a slow bull this year,” said Shi Wubin, head of quantitative investing at Chengen Capital Management, which has more than 2 billion yuan in assets. “It was just like a small spray in the history of the market.”

--With assistance from Zhang Dingmin.

To contact the reporters on this story: David Ramli in Singapore at dramli1@bloomberg.net;Bei Hu in Hong Kong at bhu5@bloomberg.net;Melissa Karsh in New York at mkarsh@bloomberg.net

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

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