Shin’s $237 million KS Asia Absolute Return Fund made more than triple the 15 per cent average gain this year for hedge funds focused on Asia

Hong Kong

A Hong Kong hedge fund started by a former Kingdon Capital Management employee rose 48 per cent through October by wagering that fears over North Korea would increase while worries of a Chinese credit crisis would recede.

“As a Korean, I perceived that the risk from North Korea was a lot bigger,” Kyle Shin, of Gen2 Partners, said in an interview in Hong Kong. Tensions flared again Wednesday, when Kim Jong Un’s regime fired an intercontinental ballistic missile into the Sea of Japan, shattering two months of relative quiet.

Shin’s $237 million KS Asia Absolute Return Fund made more than triple the 15 per cent average gain this year for hedge funds focused on Asia, placing it second among regional multi-strategy funds, data from Singapore-based Eurekahedge show. Shin, a former South Korea research office head for Mark Kingdon’s hedge fund firm, has beaten Asian rivals this year even as he invested mostly in bonds at a time when stocks rallied across the region.

Soon after Donald Trump’s election victory, Shin’s flagship fund bought South Korean sovereign credit-default swaps and sold similar protection against a Chinese sovereign default. The trade paid off when the cost of insuring South Korean bonds rose as Kim’s regime tested its most powerful weapons yet and engaged with Trump in a war of words. Meanwhile, concerns over the Chinese economy were mitigated by growth rates close to 7 per cent as the nation tackled risks in its financial system.

The chart below shows how the South Korean and Chinese credit-default swaps eventually converged.

Shin started the flagship fund in January 2010 with $6 million in assets. The fund’s investments also include buying European and Asian banks’ additional Tier-1 notes, which let issuers suspend interest payments if they run into trouble, and are written off or convert to equity if a bank’s capital ratio falls below a certain level. Shin argues that the returns are out-sized for the risk, especially when Federal Reserve interest-rate increases point to an improving global economy and hence a better environment for banks.

“For people like myself with an equity background, this is safer than equity and gave me a 20 per cent return,” he said.

The fund also invests in Chinese corporate bonds which have so-called standby letters of credit from major banks, which are pledges to financially backstop the firms if they get into trouble.

Gen2 Partners manages $381 million of assets, with more than 90 per cent allocated to credit and less than 10 per cent to equities, according to Shin, although he says he’s planning to deploy more money to stocks. Besides running five smaller multistrategy and credit funds, the firm provides consulting services to clients on an additional $500 million of investments.

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