Mr. Ren Wu is a senior hedge fund risk officer with decades of experience across multi-strategy funds across North America and Asia. He discusses the nuances of risk management in the current market environment and the changing face of hedge fund investments in China.
Ren, thank you for your time, can you please tell us a bit about your background?
Thank you for the opportunity to share some of my thoughts here. I have been managing and building hedge funds for the last 15 years. The last six years in Asia. Like many hedge fund colleagues, I worked for the sell-side before joining a hedge fund. I have also worked as a strategic consultant/adviser. I started my career as an aerospace engineer.
How did risk management change post the GFC?
Two of the main causes for the GFC were complexity in financial products and the associated hidden leverage. These two topics took up significant mind share of the risk management profession. Many of the complex products, such as CDO and CDO Squared, have not returned to their pre-GFC popularity as far as I know.
Risk management teams have asked for more transparency and clarity in terms of risk profile of the financial instruments held by their respective firms.
The GFC was almost 15 years ago. It is rather concerning that cases, such as SVB, are happening in the financial systems due to, at first glance, similar causes that led to the GFC.
What drew you to the opportunity in China?
I went to Asia in 2016 with the strong conviction that, as the market matures in Asia (particularly in China and India), Asia could offer attractive risk/return profiles and opportunity for diversification in investors’ portfolios.
Developed markets like the US tend to be more efficient and more efficient markets might be less conducive to outsized returns. I am still convinced Asian markets might still be less efficient today and have greater potential for alpha. Of course, with less efficiency, investors have to be more acutely aware of associated risks.
What market requirements and risk management challenges are unique to China? Regulation? Geopolitics? Demographics? Liquidity?
As mentioned above investors have to be more acutely aware of risks associated with less efficient markets. China’s capital market is young with less than 50 years of history. The market innovated quickly in not so long a period of time. There are challenges that come with such rapid development. Part of what the GFC experience taught all of us was fast innovations might lead to incomplete or insufficient regulations and risk management.
Particularly all these rapid innovations happened mostly within one macro/policy paradigm. With the changing macro/policy environments both globally and regionally investors should remain vigilant in how the system could behave.
What if anything has changed in your outlook to China investing?
As mentioned above we might be facing a potential regime change in terms of macro/policy globally. Central banks in developed economies pursuing higher for longer rate policies will lead to differentiated outcomes in different pockets of the economies.
It might not be clear how things will unfold as we come close to the end of the hiking cycle for the central banks of developed economies. One thing we can be certain of is the higher cost of dollar-based capital (at least for a while). I am intensely interested in how the seemingly divergent policy objective of the PBOC could affect the outlook for the region.
What risks to China are underestimated?
I am not certain if anything in particular is underestimated. However, as discussed earlier, financial markets developed rapidly and impressively in less than 50 years and almost in one particular macro/policy cycle. I worked as an aerospace engineer early in my career and practiced risk management for more than two decades. I always pay more attention to system integrity during stress conditions. I hope all my colleagues have given appropriate consideration to such issues.
What is your outlook for investments in China going forward?
I have learned throughout my career that capital allocation is as much of a tops-down process as it is bottoms-up. When I think about the outlook for any investment, I always start with what are reasonable expected returns and associated risks. Furthermore, I consider the dataset both in terms of time series and cross section.
Would China continue to deliver outsized returns as the economy matures? The likely answer might be less affirmative. Would China offer reasonable risk adjusted returns in an uncorrelated manner? My view would be far more constructive.
Where is the best investment environment in Asia now?
The old Wall Street adage says there is always a bull market somewhere. Asia is big. That’s the one thing I have learned during my time. With its immense size, Asia will continue to be an important part of any investment portfolio.
The key challenge is what your desired risk/return profile is and whether you are able to extract the required returns within your risk tolerance.
What do you know now that you wish you knew at the beginning of your career?
Like most of us I started my career as a romantic idealist. So many things I have learned along the way I wish I knew earlier. One of the most important lessons I learned is that the rational and efficient market can be irrational sometimes. Furthermore, the market can stay irrational for an extended period of time. I always think ahead of time how I would handle such episodes.
What question do savvy investors ask about risk management in Asia?
Savvy investors usually ask a manager what market environments their strategy performs the best or worst. Along that line I would always ask potential PM’s if they remember how they operated in an environment different from the current one, what that environment was, and how they have done.
