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Ex-Nomura trader launches Tencent-backed hedge fund

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An ex-Nomura Holdings trader has started a hedge fund focused on emerging-market corporate bonds at a money manager backed by Tencent Holdings.

Desmond How, who headed a proprietary trading desk covering credit products at Nomura, launched the long-short fund on Monday at GaoTeng Global Asset Management. How joined GaoTeng, the Hong Kong-based investment firm set up by Tencent and Hillhouse Capital Management, in 2017 as head of fixed income.

The new fund, which will focus mostly on dollar-denominated debt, will have the capacity to manage as much as $3 billion, How said in an interview in Hong Kong. He declined to say how much money it has raised so far.

The fund will pursue long-term investments in conditions that How says may already equate to a bear market, after emerging credit markets saw a wave of defaults in 2018.

“I might be contrarian but I think we already entered the credit bear market last year,” How said. “We are likely to witness more volatility this year, which is a great backdrop for our new fund.”

How has more than 22 years of investment experience in fixed income. He joined Lehman Brothers in early 2008, which was later sold to Nomura, where he worked from 2008 to 2017. The team he led there, known as Global Capital Management, made investments in credit products with Nomura’s money. He was ranked No. 1 by The Asset magazine as the most astute investor in Asian G3 bonds for four consecutive years from 2013 to 2016, according to a profile on GaoTeng’s website. His team was named top investment house for hedge funds by the same magazine in 2015 and 2016, the profile said.

Prior to Lehman, How worked as a credit portfolio manager at Prudential Investment Management, which is now known as PGIM.

GaoTeng is a joint venture established in August 2017 by Tencent and Hillhouse Capital, the investment firm founded in 2005 with an initial backing from an endowment led by Yale’s Chief Investment Officer David Swensen. Hillhouse was an early backer of Tencent, the Shenzhen-based internet giant. GaoTeng doesn’t disclose its assets under management, the investment firm said. It currently has 40 employees and is still recruiting, it said.

How is in little doubt about the direction of the market after emerging-market corporate bonds posted their worst performance — a 1.3% loss — in a decade last year. Risk appetite soured amid rising U.S. interest rates, fears of a slowdown in China and concerns over a trade war between the two nations.

“Some people might mistake it for another mid-cycle correction but this time around, the default rate, which is an important barometer to gauge the market and where it’s heading — there’s only one direction: upward,” he said.

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His strategy is to hedge out market risk by buying protection on credit indices. And for esoteric default risk, the team will borrow bonds to short to be more effective.

How said he sees opportunities in the likelihood of more downgrades than upgrades, especially among issuers at risk of becoming so-called fallen angels, those at the low end of the investment-grade scale that are reduced to junk status.

“I see some spread decompression play, especially for fallen angels,” he said. “When a BBB credit becomes junk, there’s temporarily some dislocation as you lose investment-grade investors, while high-yield investors aren’t ready to capture them yet, which results in some exaggerated price action.”

How believes there are more attractive credits to pick from in Latin America, Central & Eastern Europe, Middle East and Africa, rather than Asia.

Bloomberg News