Key Takeaways
- • Zhao Danyang's Pureheart Capital Asia posted a 24% return on its Pure Heart Value Investment Fund over seven months in 2013, three times the 8% gain of the Eurekahedge Asian Hedge Fund Index, driven by concentrated exposure to Chinese equities.
- • Pureheart shifted from 50% to over 80% of its $217 million AUM into Chinese stocks traded across Hong Kong, Singapore, the United States, and mainland exchanges after a six-year bear market reduced valuations to historical lows.
- • The fund manager, who paid $2.1 million at a 2008 charity auction for lunch with Warren Buffett, reversed a 2008 decision to liquidate five yuan-focused funds (combined $200 million AUM) after valuation dislocations created what he characterized as "a good time for optimists" to acquire bargain-priced equities.
- • The Shanghai Composite Index declined 61% from late December 2007 through August 2013, while the H-share index fell 40% over the same period, establishing the contrarian entry point that prompted Pureheart's tactical repositioning.
Summary
Zhao Danyang's Hong Kong-based hedge fund firm Pureheart Capital Asia has capitalized on extended weakness in Chinese equity markets through a tactical reallocation that has significantly outperformed regional benchmarks. The Pure Heart Value Investment Fund generated a 24% return over the first seven months of 2013, substantially exceeding the 8% gain posted by the Eurekahedge Asian Hedge Fund Index. This performance divergence reflects Zhao's decision to increase Chinese stock exposure from 50% to over 80% of the firm's $217 million in assets under management.
The repositioning marks a reversal of strategy from January 2008, when Pureheart liquidated five funds specialized in yuan-denominated shares with approximately $200 million in combined assets. At that time, the fund manager concluded that attractive investment opportunities in Chinese equities had been exhausted. The extended bear market that followed created conditions for a return: the Shanghai Composite Index declined 61% from late December 2007 through the end of August 2013, while the H-share index fell 40% over the same interval. These price declines reduced valuations to levels that prompted Pureheart to resume accumulation.
In communications to investors, Pureheart framed the market environment as presenting opportunities for disciplined value investors, stating that "falling share prices will provide a very good opportunity for us to buy the carefully selected shares at a bargain." The fund acknowledged the structural headwinds affecting Chinese equities—characterizing the market as "still in a bear market"—while emphasizing that depressed valuations warranted selective exposure for investors with conviction in long-term Chinese economic development.
Zhao's investment philosophy and track record have drawn comparisons to Warren Buffett's value-oriented approach, evidenced in part by his $2.1 million bid at a 2008 charity auction for a lunch engagement with the Berkshire Hathaway CEO. The strong returns generated through Chinese equity exposure in 2013 demonstrate the potential payoff from deploying capital during extended market dislocations when most participants have exited the asset class.
The repositioning marks a reversal of strategy from January 2008, when Pureheart liquidated five funds specialized in yuan-denominated shares with approximately $200 million in combined assets. At that time, the fund manager concluded that attractive investment opportunities in Chinese equities had been exhausted. The extended bear market that followed created conditions for a return: the Shanghai Composite Index declined 61% from late December 2007 through the end of August 2013, while the H-share index fell 40% over the same interval. These price declines reduced valuations to levels that prompted Pureheart to resume accumulation.
In communications to investors, Pureheart framed the market environment as presenting opportunities for disciplined value investors, stating that "falling share prices will provide a very good opportunity for us to buy the carefully selected shares at a bargain." The fund acknowledged the structural headwinds affecting Chinese equities—characterizing the market as "still in a bear market"—while emphasizing that depressed valuations warranted selective exposure for investors with conviction in long-term Chinese economic development.
Zhao's investment philosophy and track record have drawn comparisons to Warren Buffett's value-oriented approach, evidenced in part by his $2.1 million bid at a 2008 charity auction for a lunch engagement with the Berkshire Hathaway CEO. The strong returns generated through Chinese equity exposure in 2013 demonstrate the potential payoff from deploying capital during extended market dislocations when most participants have exited the asset class.
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