G2’s “EDGE”

“Edge”/opportunity

We’ve identified at least four major sources where we can earn above-average risk adjusted return:

1) tremendous inefficiency in Hong Kong equity market as traditional top-down and long-only approach still dominates. This gives fundamental bottom-up research great competitive advantage, particularly in a downturn or under extremely volatile market conditions;

2) tremendous information lapse between Hong Kong market and mainland Chinese domestic A share market even though the underlying corporations or industries share the same dynamics

3) lack of trading competition for Pan-Pacific concept due to time difference – not many long/short equity talents willing to trade both US and China stocks around-the-clock like global macro PMs do (except for investors based in San Fransico, which would be an ideal location to run a Pan-Pacific strategy);

4) US consumers and China government spending are two most demand drivers behind almost everything and often they form interactive dynamics, creating many unexpected opportunities for a Pan-Pacific fund like us to exploit.

We believe the competitive landscape of hedge funds has changed dramatically since the most recent financial crisis. The convergence of top-down macro fund strategy and bottom-up fundamental long/short strategy has started to emerge. Our G2 fund is exactly a product of such changes, seeking to capture the best sides of both top-down and bottom-up approaches with an optimized talent resource and knowledge base. From bottom in our hearts, we’re value-oriented business investors, trying to earn from risk premia inherent in the capital market over long term. On the other hand, we’re disciplined hedge fund traders, taking advantage of mean reverting opportunities delivered to us almost every day by “Mr. Market”. 

We’ve picked China/HK and US as our major investment universe simply because we know these two markets  best, hence our core competence. We’re aware of the fact that at any given time, other countries might offer better risk/reward than these two countries. We also admit, to truly hedge out the market risk, particularly the “tail risk”, we might need to be more creative and deploy more complex strategy including options, futures, fixed income, currencies, and other derivatives or even exotic products. These are all good reasons to operate as a plain vinilla global macro funds. Nevertheless, we will stick to our fundamental long/short in just US and China/HK because we believe sector/stock diversification, exposure to both US and China, one being the largest free economy as well as the larget consuming country and the other being the largest commanding economy as well as the largest producing country, and the ability to short both markets, offer us plenty of ways to manage risk.

Mark Twain once said: ” Respect those who seek the truth, be wary of those who claim to have found it.”  We’re aware of all sorts of downside to our strategy indeed. Are we concerned about big “tail risk”, such as a bioterror attack on the US, a war between India and China, a nuclear bombing by North Korea, or anything even worse? Yes, but such tail risk events, if unfolding, would have equal impact on whatever strategies you might use since capital flow around the whole world would stop. We don’t believe any “Black Swan” event would burst out all of sudden. There would be many indicating signs before it occurs. Despite being fundamental long/short stock pickers, we’re just like any global macro fund investor who would constantly follow seemingly discrete events around the world to spot “red flags”. Our trading experience has given us a global macro investing mind. Our subscribed research services as well as intensive reading from Foreign Affairs to Economist also give us good quality “food for thoughts” to think well ahead of the herd. More importantly, the “core idea portfolio”, i.e. our best conviction research ideas, consists of companies whose value largely resides in long-lasting franchise with high barriers to entry or hard-to-replicate and scarce physical reserve assets (“GOOD BUSINESS”), whose management is capable of protecting and maximizing shareholders’ value (“GOOD MANAGEMENT”), whose balance sheet is reasonably healthy under stress test and free cashflow generation capacity is strong over a cycle (“STRONG FINANCIAL”), and whose market value doesn’t price in any significant “home-run” opportunities in next 2-3 years (“FREE CALLS”). Such world-class business portfolio with significant capital appreciation potential is the ultimate reason why we can sleep well at nights because we know, if we manage to limit our downside risk to 15-20% of our capital in the worst case, which we admit the probability of its occuring will likely be much bigger than we could ever imagine, and we still have meaningful ownership in these great businesses, we will not only recover our loss quickly but also thrive even better post crisis.

To win, we obviously can’t just struggle to follow others’ steps. However, we believe to make money, which is the whole point about our business, it doesn’t require 10 steps ahead of other people, either. We probably need to be just 2.5 steps ahead. That’s what we do here at G2 Fund. Combining top-down and bottom-up, examining global economic and political developments on macro level and analyzing individual company operation trends on micro level, and more specifically to us, being laser-focused on the two most important economies in the world, should enable us to achieve just that.

From our career experience, we’ve seen many excellent analysts. However, we’ve not seen many good money makers or winning traders. Not because too many of them are not smart enough. On the contrary, they’re usually much smarter than us. But in this business, being smart is not enough. Being right is what only matters. And that requires knowledge, attention to details, resourcefulness, discipline, contrarian thinking, emotionlessness – and of course, luck.

As global macro has become global micro, we’re moving closer to them from the other end, shifting from a micro strategy to quasi-global (Sino-US) macro with focus on equities. We believe we can meet the best global macro minds somewhere in the middle. One day, we might further expand to accomodate other asset classes, such as currencies, fixed income, etc., but we will never ever lose sight of our core competence – value investing in the world’s two most important economies.

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