Atlantis's Liu Failed to Predict China Stock Slump, Buying Now

By Bernard Lo and Bei Hu

Oct. 21 (Bloomberg) -- Liu Yang, manager of the Atlantis China Fortune Fund that halted redemptions this month, said the magnitude of market declines caught her by surprise and the fund didn't hedge sufficiently against falling asset values.

The Atlantis China Fortune Fund lost 63 percent this year through Oct. 6 as China's equity bubble burst and the global financial crisis caused investors to flee emerging-market stocks. Assets under management have dropped to $135 million from a peak of $908 million a year ago, according to data compiled by Bloomberg.

``I was a little bit optimistic towards the China fundamentals,'' Liu, 44, said in a Bloomberg Television interview today. ``I don't believe that I hedged enough to protect the downside because I was optimistic. Because I'm so focused on China, I wasn't in a position to figure out what's happened in the U.S.''

Liu, who manages about $2 billion of China assets, said she bought $28 million of Chinese stocks last week. The nation's benchmark CSI 300 Index reached its lowest level in almost two years on Oct. 16.

Fund managers worldwide are trying to stem investor redemptions after a credit crisis left a trail of more than $660 billion of losses and writedowns at financial firms since early 2007, driving the MSCI World Index down 37 percent this year.

Short Selling

Liu said she hedged the fund's stock holdings by short- selling the Hang Seng China Enterprises Index, which tracks China-incorporated companies traded in Hong Kong, three times in nine months. She covered the short positions too early, failing to anticipate that Wall Street turmoil would drag China stocks down further. The Hang Seng China Enterprises index lost 36 percent between June 30 and yesterday.

In a short sale, an investor sells a borrowed security, aiming to profit by repurchasing it later at a lower price and returning it to the holder, pocketing the difference.

Some 328 investors, including long-term clients such as endowment funds, have stuck with the China Fortune Fund, Liu said. The decision to halt redemptions and suspend calculating net asset values from Oct. 7 shielded remaining investors from deeper losses, she said.

The China Fortune Fund won AsiaHedge's fund of the year award in October last year, making Liu the first woman to pocket the honor.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net