Permal tries hedging its bets in China

Domestic consumption spurs rising investment by hedge fund

BEIJING - Permal Asset Management Inc, one of the world's oldest and largest hedge fund houses, is taking a $150 million bet on the Chinese economy, investing in companies that will benefit from the country's economic rebalancing drive.

Isaac Souede, chairman and chief executive officer of the group that oversees $21 billion in assets globally, said his China Special Fund is heavily weighted toward stocks in the healthcare, consumption and real estate sectors.

"In general, we are more interested in local companies with local consumption stories," Souede said on Wednesday. "The export sector was the way to invest in China over the last 10 years, but it's not about investing in China over the next 10 years," he said.

China is moving to boost domestic demand with more government investment on healthcare and infrastructure, he said.

"Urbanization in China has another two decades to go as the country is rebalancing away from rural to urban areas. In that case, you will see property companies continue to build middle-class housing as China urbanizes," he said.

Permal launched the China Special Fund with an initial investment of $25 million in April, when the mainland stock market was about to undergo a major correction due to a government clampdown on the real estate sector.

But Souede said the fund has withstood the market test, as it outperformed the benchmark Shanghai composite index and reported an accumulative 10 percent increase in returns between April and October. The Shanghai exchange was down 4 percent during that period.

The strong liquidity wave has lifted the Chinese stock market by 28 percent from the July low, making investors speculate that the strength of the Chinese capital market will continue as more external funds flow into the country looking for better investment returns.

Souede said the Chinese market is in the "trading range", as there will be money coming in and tightening measures from the central bank will also continue.

China raised the interest rate by 25 basis points in October in an attempt to combat rising inflation and soak up excessive market liquidity, and analysts said there could be more interest rate hikes if the inflationary pressure does not ease.