The document discusses value investing strategies in the U.S. and China stock markets. It analyzes data showing that allocating 15% of a portfolio to hedge funds can increase returns by 0.3-0.5% while reducing risk. However, the wide variation in hedge fund performance shows the importance of manager selection. Seasonal patterns are identified, with better performance periods in the U.S. from June-April and in China from September-March. The document recommends a long/short strategy taking long positions in the outperforming market and short positions in the other to reduce correlation and obtain profits.

1. Value Investing in U.S. & China
U.S. Hedge Fund
According to data collected by BlackRock between 1997- 2011 in U.S., if we invest 15%
of a portfolio into hedge funds, about 0.3%- 0.5% of additional return will added to the
traditional portfolio; while reducing risk to the traditional portfolio is about 0.2%- 1.2%.
The diversification benefits of hedge funds arethought to be the result of hedge fund
managers seeking market inefficiencies and lower correlation with traditional
investments and markets. In addition, the difference between good hedge fund
performance at an annualized 24.3% and bad hedge fund performance at an annualized
-18.1% is very wide 42.4%. This shows the significance of selecting a good hedge fund
manager for maximizing portfolio performance.In my opinion, the additional
contribution to performance of a15% allocation to hedge fund will be is lowered by the
bad hedge funds present in the time period. What matters is that the hedge fund has a
good manager and good team with a special approach for outperforming the market and
average hedge funds.
Relative value and long/short equity hedge funds have a somewhat large positive (0.6,
0.9) correlation with stocks and smaller, negative (-0.2, -0.4) correlations with bonds. A
well-diversified portfolio (60% stocks & 40% bonds)withshows higher correlationto
stock market indices (0.99) than a pure hedge fund portfolio. A portfolio balanced
betweenU.S. & international stocks showed increasing correlation in the resent past,
with an R-squared of 0.54 from 1980 to 1990 increasing to 0.88for the period
1990-2000.According to BlackRock, hedge funds during 1997- 2011 showed about 50%
of the volatility of stocks. Thus, adding a 15% exposure to hedge funds into the whole
portfolio helps reduce the volatility of portfolio performance. Picking a good hedge
fund will definitely offer superior diversification benefits. Even though future

2. performance is independent of historical performance, investors can still try to choose
the right hedge fund for them according their risk preference, fee structures, hedge fund
strategies, and hedge fund team structures.
Cannell Capital
Cannell Capital is a long/short equity hedge fund using multiple- strategies, including
market neutral and relative value strategies. It’s one of the good performaninghedge
fundssince 1992. In my opinion, it offers diversification benefits for the portfolio
superior to the hedge fund show in BlackRock’s data. One of the reasons is that Cannell
Capital seeks North American small-cap investment opportunities that are neglected by
the market. Small-cap investments have higher volatility, being more sensitive to
economic news. Those investments in companies that have excellent growthpotential
and good management teams, whole being fairly to undervalued to the market may be
the best investments. Cannell also shorts companies that is considers to be over- priced
by the market. This helps create a low correlation with traditional investments and to
capture higher profits from market inefficiency. In addition, the long/short strategy can
control the net exposure of the portfolio and manage volatility to a certain extent.
Cannell Capital’s investment style is based on a combination of fundamental,
bottom-up, and quantitative analysis with internal and external research. This gives the
firm the ability to generate attractive absolute returns for its clients. Another reason for
Cannell’s superior performance characteristics that Cannell Capital applies
value-investing theories and invests in those companies with cheap price. These
investments have lower value-at-risk and protect investors from the downside market
risks.
Chinese Hedge Fund
According to Moody’s, the projected growth for 2013 is 2% for developed countries
and 5.7% for emerging markets, while the growth rate of China is projected to be

3. 7%.Wikipedia states that 0.1% of China’s GDP belongs to hedge funds, while 80% of
bank deposits belongs to the wealthiest 20% of the high-net-worth population. As we
can see, the growingnumber these high-net-worth individuals can be a very beneficial
for hedge fund development. In China, some hedge funds are private and some are
backed by the government. According to Clifford Changes, hedge fund in China are
expected to growth to 0.4% of GDP in the next 10 years. One representative is the
Sunshine Fund, a closed-end fund regulated by China Banking Regulatory
Commission, reached assets-under-management of about 190 billion RMB in 2011.
Other private funds are subjected to additional regulations; while are “underground
funds” that is funded by private capital are unregulated.
Due to the importance of the Chinese government and regulation to doing business in
China, I recommend investing in those companies that have positive relationships with
government and will experience positive impactsdriven by regulations under eventdriven strategies. In addition, investing in Chinese equities, which trade at a cheap
price,will help limit the downside losses from a value investing point of view. For a
five-year horizon, the price movements of both U.S. and Chinese stock markets can be
summarized by collecting historical data from Finance.Yhaoo! and Finance.Sina. The
historical performance of the stock markets in U.S. & China between 2008 and 2012 is
as follows:

4. 2008- 2013 Stock Markets (U.S. & China)
4400
3900
3400
2900
2400
1900
1400
900
Shanghai Composite
Shenzhen Composite
S & P 500
2013
Q3
2012
Q3
2011
Q3
2010
Q3
2009
Q3
2008
400
Russell 2000
Collected from Finance.Yahoo! &Finance.Sina. (06.21.13) (adjusting Shenzhen Composite by dividing 3.6
Starting Point of Up & Down
U.S.
Down
China
Up
Down
Up
2008 May
Dec
Apr
Dec
2009
Feb
Jul
Sep
2010 Apr
Aug
Mar
Jun
2011 Apr
Sep
Mar
Dec
2012 Apr
Jun
May
Nov
2013
Jan
Jan

5. Recommendation
Long Period
Short Period
China
September -March
March- September
U.S.
June- April
April- June
Correlation between U.S. and China Market
Shenzhen Composite
Shanghai Composite
S&P 500
0.0770
0.0216
Russell 2000
0.0372
-0.0819
As can be seen in the above graph and charts, after collecting the starting month of
stock markets for each year, we can estimate the approximate time for long/short
decision in a passive investing style. In China, the time period recommended for taking
more long positions and less short positions is between last year’s September and next
year’s March. The rest of time is recommended for more short positions and less long
positions. We called it “sell in March and go away”. In U.S., the time period
recommended for taking more long positions and less short positions is between last
year’s June and next year’s April. The rest of time is recommended for more short
positions and less long positions. We called it “sell in May and go away” according to
Seeking Alpha.By applying long/ short seasonal strategies in both U.S. & China stock
market, both net exposure and correlation can be reduced. It is easier to obtain profits
by taking more long positions in U.S. and short positions in China.

6. Appendix

7. BlackRock- Alternative Investment Education Center (03.08.2013)
BlackRock- Alternative Investment Education Center (03.08.2013)

8. BlackRock- Alternative Investment Education Center (03.08.2013)
BlackRock- Alternative Investment Education Center (03.08.2013)
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