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How a modest hedge fund returned six times the global average
[HONG KONG] Monica Hsiao doesn't follow anyone's playbook.
She founded Triada Capital, a credit-focused firm in a region where equity is king and stock managers control the vast share of hedge fund assets.
The straight-talking native of Guam cobbled together a modest US$7 million to start the fund, fuelled partly with savings from her parents. That's about one-third the average amount an Asia-focused firm has started with in recent years - and paltry by credit fund standards - yet Triada has proved small can be beautiful. The fund has generated outsized returns, gaining almost 10 per cent after fees in the first quarter.
Part of Triada's success stems from Ms Hsiao's dedication to conducting thorough research on companies. While its hedge fund can make value investments and profit from shifting spreads between related securities, most of the gains come from Ms Hsiao taking a view on credit events such as mergers, refinancing, reorganisations, rating changes or asset sales.
Ms Hsiao, 49, is different from a typical hedge-fund manager in other ways, too. This is a second career for her: she had earlier been a mergers-and-acquisitions (M&A) and private-equity lawyer in New York.
By the time she got into investing via Nomura Holdings' proprietary trading desk in London - first as an intern and later helping to set up the capital structure arbitrage team - she was also juggling family responsibilities as the mother of two young children.
At Nomura, and on the prop trading desks of Credit Suisse Group and Merrill Lynch, as well as at hedge fund CQS, she used her legal training to figure out strategies as she went along. She managed to avoid annual losses and turned in one of her best performances in 2008 amid the financial crisis.
At Triada, by watching credit events like a hawk and arbitraging price differences, Ms Hsiao has returned an annualised 16 per cent after fees since the fund's inception in June 2015 - more than six times the global average.
The fund mostly invests in corporate credit in Asia.
"I really wanted to demonstrate that we could have a successful stand-alone business premised on long-short credit strategies, because I kept hearing this wasn't viable," Ms Hsiao said from Hong Kong where she has a long-term lease in a serviced office, a far cry from the slick, nameplate-branded confines favored by large funds.
"Part of me probably does also want to wave a flag for all the female portfolio managers who are minorities in the hedge fund world as well."
While almost 30 per cent of junior hedge-fund jobs globally are held by women, only 4 per cent of chief investment officers are female, according to Preqin research released in February.
Yet Ms Hsiao says she hasn't felt the need to join the boys' club, drinking and staying out late, and she doesn't have a MeToo story.
Although she has encountered what she terms as "subtle or subconscious" displays of sexism, she counts men as some of her most important mentors, grateful they took a chance on her, often the trading desk's lone woman.
"To even have the luxury of what I do today, there was serendipity," she says.
"There was also the support of a lot of people along the way, both men and women. It takes a village to give us the ability and self-belief to succeed."
One of her best recent trades involved Hong Kong Airlines, a carrier backed by embattled Chinese conglomerate HNA Group. Triada owned some of Hong Kong Airlines' US$550 million bonds due January 2019. It added to its holdings when the paper sank below 80 cents on the dollar in December amid reports of director departures and a cash shortage. Within weeks, the notes rebounded on news of state support, and were repaid at par.
"Last year was a year where there were huge dislocations of pricing and a big repricing of the entire market," Ms Hsiao said.
"We found a number of stories that were trading a lot lower on people panicking that the bonds wouldn't get paid shortly before maturity."
Back in 2008, Ms Hsiao and a colleague made more than US$30 million for Merrill Lynch's proprietary trading desk by dumping bonds in favor of credit-default swaps, instruments that are used to insure a company's debt against nonpayment. It was a prescient move: The global credit crisis later slashed bond-market liquidity, and the average hedge fund would lose 19 per cent that year.
While some value and distressed-asset investors have thrived in the region, there are plenty who argue long-short Asia credit is best left as part of a multi-strategy firm.
In Asia, there are also the challenges of fewer issuers, small issue size and liquidity constraints in the secondary market, all of which make "sourcing the right opportunities and scaling up fund capacity" tricky, according to Mohammad Hassan, the Singapore-based head analyst of hedge fund research and indexation at Eurekahedge.
Triada has been able to turn its small size into an advantage, largely by being nimble. The firm started with five people and broke even within two years. Yet there have been hurdles. Having foregone an early backer in exchange for independence, Ms Hsiao found she underestimated the difficulty of fundraising.
A 2015 study by researchers at Boston's Northeastern University found that funds with at least one female fund manager failed at higher rates, driven by capital-raising troubles.
"I'd assumed you'd have more meritocracy when you're on your own," Ms Hsiao said.
But the "reality of fundraising in the hedge fund space is that there's an element of size begetting size".
Like other small hedge funds, Triada has been subject to extra investor scrutiny. Then there's the nuanced gender bias.
Ms Hsiao recounts being asked by one prospective investor about whether not being part of the "boys' club" would put her at an information disadvantage. At another meeting, one investor maintained eye contact not with her yet with a more junior male colleague.
Ms Hsiao comes from a lineage of strong women. Her mother and father, who each attained two post-graduate degrees, arrived in Guam with only a few hundred dollars and went on to establish several family businesses. Her paternal grandmother wrote more than 40 novels and won an award after entering a contest under a male pen-name.
Ms Hsiao must have inherited that tenacious streak. When she was pregnant and working as a lawyer, she hid her eight-month baby bump so she could board planes and close deals.
"All the people of my generation would make references to the mommy track," she recalls.
"If you're on the mommy track, you're not going to get as interesting and as high-profile deals to work on. Maybe you won't get to work with certain clients. My whole goal was: I'm not going to be on the mommy track."
Ms Hsiao says she has made time for family but even so, she noticed that when her daughters played with Barbie dolls, the dolls would always be too busy, always on the phone. Both her daughters are now at Stanford University; neither intends to follow their mom into finance.
"On the one hand, I do feel a little bit of guilt," Ms Hsiao said.
"On the other, in retrospect, I feel that what I was able to provide at least was some kind of role model: A woman who can have choices and do whatever they want."