UPDATE 1-Ex-Harvest exec eyes HK after 35 pct gain in China hedge fund
HONG KONG Nov 30 (Reuters) - Beijing-based hedge fund Ariose Capital plans to expand into Hong Kong in early 2012 after a 35 percent return on its China long/short equity fund since its launch in April to the end of October, according to two sources and a letter to investors seen by Reuters.
The $60 million Ariose China Growth Fund, set up by Yi Xin, a former portfolio manager at China's Harvest Fund Management, gained 10.5 percent in October, the letter showed.
By comparison, the MSCI China Index rose about 15 percent last month and was down 18 percent between April and October. The Eurekahedge Greater China long/short equities index is down 11 percent since April.
Ariose partner Zhen Tao declined to comment.
"Going into October, we were cautious on the macro environment given the European uncertainties and China's slowing growth," the firm said in a letter to investors.
When markets fell more than 9 percent in the first two trading days of October, the hedge fund took the view that the market was oversold. In response, it covered some of its shorts and added exposure to financial, property and gambling sectors.
The hedge fund said it favoured China Merchants Bank and China Minsheng Banking Corp within the financial sector and liked Evergrande Real Estate Group for its "diversified development portfolio, low land cost and high turnover strategy" within the property sector.
"As opposed to the big four state banks, the private banks have better credit control and (are) less exposed to local government financing where we think the bulk of the bad debts likely reside," the firm told investors.
For the Macau gambling space, the hedge fund said it bought shares of Galaxy Entertainment Group Ltd given its low valuation and Sands China for its long-term mass market appeal.
For November, the firm said it maintained a cautious but neutral view on the market as the European crisis lingers and China's growth slows, while the CPI seemed to have peaked and the credit environment appeared to be loosening moderately.
"At this point we do not have a strong view of the market going forward and instead prefer to take a neutral portfolio position and seek alpha through individual name selection," it wrote to investors.
Xin, who managed more than 46 billion yuan ($7.2 billion) in a fund for Harvest, leads a team of five analysts and invests in Chinese companies listed overseas and foreign companies with a China growth theme, according to the Ariose investor presentation.
The hedge fund was seen marketing its fund at its prime broker Deutsche Bank AG's annual Asian managers forum held earlier this month.
($1 = 6.3778 Chinese yuan) (Reporting by Nishant Kumar; Editing by Chris Lewis)
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