Neil Chan takes the entrepreneurial plunge after 11 years
A typical workday for Neil Chan, CEO of start-up hedge fund Nech Capital, begins before the 8am opening of the Tokyo Stock Exchange. Multiple computer screens in his office provide real time updates while stacks of industry reports apprise his team of longer term trends. Chan shares his team’s morning activities: “Our geographical coverage starts from Japan all the way to India. We are in the office before the markets open so we can react and discuss ideas. We will also review the flash full of broker news and broker updates of the macroeconomic events that occurred during the US trading day.
“For example, the Federal Open Market Committee minutes could provide vital clues on monetary tightening measures where it may directly or indirectly have material impact on Asian markets.”
Professionally managed funds have access to a timely flow of trading information and allow investors to outsource the chore of constantly monitoring market movements. Hedge funds offer more flexibility than mutual funds and are able to short sell stocks, employ leverage or trade financial derivatives. Nech Capital’s mandate is to apply an equity long/short strategy to Asian securities.
Chan seeks to capitalise on any asset mispricing. “Nech Capital covers a core investment universe of 1,000 stocks,” Chan explains. “When our valuation model shows a large deviation from the prevailing market price, we will trade that stock. We can buy undervalued stocks or short overvalued ones and use leverage to amplify returns. Since the fund may have both long and short positions on different stocks simultaneously, risk management is done on a portfolio basis and we stick to a one-day value at risk level of 1.5 percent.”
ASEAN: Growing region, plentiful profits (for those with local knowledge)
The economic rise of Asia has brought increased competition from foreign hedge funds in search of higher gains. Asian markets are less efficient than those in developed Western countries and offer more opportunities for funds to capitalise on the results of the primary research and due diligence they conduct. Over a decade of experience investing in Asia allows Chan to understand the subtleties of the regulatory and business environment.
“My local knowledge helps me react quickly to situations that others may be unfamiliar with,” Chan elaborates. “I can meet managers within this geographical space to understand their business and the challenges they face. I can get this information in a timelier manner compared to someone who is situated in another time zone.” Foreign hedge funds with similar mandates will be disadvantaged, especially when dealing with illiquid securities in emerging markets, in maintaining close contact with company management teams and having access to the local supply chain.
Nech Capital is located in Shenton Way, the heart of Singapore’s business district. Even though the local stock market is small, Singapore provides a conducive regulatory environment for the finance industry. As a global financial capital, Singapore is home to many hedge funds. Hiring managers find it easier to employ investment professionals from the local pool of well-educated, English-speaking labour force. Singapore is also well positioned within Asia Pacific, and serves as a gateway to emerging ASEAN economies.
“Valuations for some ASEAN countries are relatively cheap,” Chan asserts. “Singapore is not expensive at 12X PE. Thailand has a PE of 16X but its GDP growth has been stable and on the uptrend. After some political turmoil, investors have been regaining confidence. Vietnam is still a closed market; not many people understand how to unearth gems there. There are many well-managed companies with prospects for exponential growth. I still believe in the growth prospects for Europe and the U.S., but I would rather focus my efforts where I have a competitive advantage.”
Consistently generating returns better than the benchmark MSCI Asia Pacific Index over the past decade gave the former proprietary trader and portfolio manager the confidence to launch Nech Capital. Without a track record, Chan had to turn to those who know and trust him. Investors, consisting of friends, family and his former employers Lumen Capital, pledged S$7 million for NECH Capital to begin operations.
Chan started deploying capital in August 2017. While hedge funds typically charge a two percent management fee in addition to a twenty percent performance fee (‘2 & 20’), he decided on a one and twenty structure with a low minimum sum (S$150,000) to allow more people the chance to invest. Chan makes it his duty to ensure the interests of investors are placed first.
“The whole hedge fund industry has been driven by high fees and high returns for the managers,” Chan points out, “while performances have been poor for the past few years, notwithstanding this one. I believe that we managers need to take seriously our fiduciary duty to look after investors. My investing style is fairly conservative and I adhere to strict risk controls. Clients are reassured that I have never lost money in any of the 11 years I have been trading.”
Who’s the boss?
As the CEO of a start-up, lunchtime does not offer Chan any respite from work. Working lunches with potential investors are a weekly routine. Capital-raising effort is a continuous and difficult task. To the uninitiated, the hedge fund industry may seem like a shady area of high finance, available only to the ultra-rich. After the subprime crisis, hedge funds were viewed as unregulated black boxes while their managers were perceived as risk-taking traders who lived life in the fast lane. Several funds had lost money by investing outside their mandates or by simply defrauding investors (research shows that sports car-driving hedge fund managers do take on more investment risks that do not correspond to greater returns).
Of course, not all hedge funds are scams and not all managers are thrill seekers. When properly used, hedge funds are investment vehicles that can provide higher returns and diversification benefits. Active management allows the fund to capture alpha (supernormal returns) and create an investment sub-portfolio that is lowly correlated with the general market. During the day, Chan reviews the strategy and daily P&L with the team: “We constantly reassess our current and prospective positions for entry and exit points.”
Chan’s work is not finished even after the major Asian markets close. An opportunist at heart, Chan reserves a small portion of the fund to deploy globally whenever the chance arises. He explains: “It is impossible to cover every single stock in the world. However, I might come across interesting opportunities outside Asia through conversations with industry professionals or by reading news articles. The fund has two components; one is driven by fundamental, and slightly longer term, ideas. Another trading component drives a lot of short time frame activities. The idea of the added tactical component is to mitigate risk in the long run and generate near-term alpha in tight ranging and opportunistic markets.”
With at least one market open at any one time, Chan makes a conscious choice to reserve time for the family at the expense of extra income. After leaving the office, he takes on the role of a chauffeur, picking up his wife and children in his family car. The evening routine consists of dinner and reading a minimum of five bedtime stories. Preparation for the next trading day begins after his children are asleep. Chan’s market watch resumes with the opening of the U.S. markets.
Just another day in the life of a hedge fund manager.
 Stephen Brown, Yan Lu, Sugata Ray, and Melvyn Teo, Sensation-seeking hedge funds, 2017, Mid-Atlantic Research Conference in Finance 12th MARC 2017, March 17, Research Collection Lee Kong Chian School of Business, http://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=6252&context=lkcsb_research, accessed October 2017.
Last updated on 30 Jan 2018 .