Global Economics

Surviving China's Stock Meltdown


Aaron Boesky's Marco Polo fund focuses on Shanghai-listed shares. With the market at a 52-week low, he admits it's not for the faint of heart

Amid the wild ups and downs of financial markets this year, there's been one constant: No matter what happens, the Shanghai market will fall. For instance, when all other Asian markets soared in early September after the U.S. government announced its rescue of Fannie Mae and Freddie Mac, Chinese shares sank (BusinessWeek.com, 9/8/08). With investors worried about inflation, an export slowdown, and slumping demand in the U.S. and other countries, the Shanghai market has plunged (BusinessWeek.com, 8/12/08) 64% since the start of the year, making it by far the worst-performing market in Asia. And it's still falling: From a high last Oct. 16 of 6124 points, the index fell to a new 52-week low on Sept. 17, closing at just 1924 points.

It's not the best time to be one of the only U.S. fund managers specializing in the Shanghai market. Yet that's the position Aaron Boesky, a 33-year-old Michigan State graduate, finds himself in now as the Hong Kong-based founder and chief executive officer of Marco Polo Pure Asset Management, a boutique fund that focuses on trading Shanghai-listed shares. Marco Polo, he says with irony, is the "poster child" for the market's collapse. Boesky (his cousin is 1980s-era financier and convicted insider-trader Ivan Boesky) launched the fund in 2004 and at its peak early this year had $175 million under management. The figure has shrunk to about $115 million, he says, largely because of the meltdown in the Shanghai market. "We are at the epicenter of what has happened," he says.

How bad has it been? Boesky compares the Shanghai slide to the end of the Internet bubble early this decade. The dot-com slide, though, took place over several years, while Shanghai collapsed in just a matter of months.

"We Are Believers"

Still, he says his investors have not suffered the worst of the carnage. During the good years, when Shanghai was booming in 2006 and most of 2007, his fund posted returns of 100% or better, he says, outperforming the market. "We gave investors 133% returns last year," he boasts. Now the fund is down 37% year-to-date, he says. But that's better than rivals such as the Morgan Stanley (MS) China A Share Fund (CAF), down 46% for the same period. Boesky says he and his managers began taking defensive measures last August, well before the market peaked in the autumn. That's not so easy in a market like Shanghai, which does not allow shorting of stocks. He says that Marco Polo was able to do some shorting of offshore ETFs and futures to hedge some risk, but "ultimately we are long-biased," he says. When it comes to the China stock story, despite the big drop this year, "we are believers."

Besides, as anyone who invests in emerging markets knows, places like Shanghai are not for the faint of heart. People putting their money with Marco Polo are gambling on getting big returns when the market takes one of its wild rides upward. Boesky points out the market dropped 41% after he first opened the fund, but then it took off. "This is not the first time we have seen this activity," he says.

That said, this plunge is enough to scare even the truest believer in Chinese shares. Some people speculate the Chinese government might intervene by setting up a stock stabilization fund or take other measures to prop up Shanghai shares. Boesky and his team don't buy it. "As crazy as the drop has been, this shows the maturity of the Chinese government," he says. "They allowed the market to stay open. They have not intervened in a significant way."

Nowhere to Go but Up?

As for his famous cousin, Aaron Boesky says Ivan has no role in Marco Polo. "Ivan was a great innovator," says the younger Boesky. "He made some mistakes." Aaron praises Ivan as the man "[who] essentially invented merger arbitrage, risk arbitrage, much of which fueled today's hedge-fund industry."

Looking for a bright side to the current gloom, Boesky says the market doesn't have much more room to fall anyway. Shanghai-listed stocks are now trading at an average price-earnings ratio of 15, compared to upwards of 72 a year ago. The average p-e for the market is 30, he says. "We feel our feet are touching bottom now," he says hopefully, adding that next year could be good since stocks have fallen so far, so fast. "We've set the bar very low now." In the new year, "We are set up now for some very easy layups."

Einhorn is Asia regional editor in BusinessWeek's Hong Kong bureau.

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