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After Dominating the Market in Q1, Here Are Billionaire Fang Zheng’s Top Picks for Q2

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Fang Zheng’s Keywise Capital is coming of a strong first quarter, during which the weighted average returns of its eight long positions in companies with a market cap of at least $1 billion totaled 10.2%. Zheng’s equity portfolio remains relatively unchanged, save for one major move that has cut the value of his equity portfolio nearly in half, to $51.48 million heading into the second quarter from $96.17 million at the start of the year. That move was his complete selloff of Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), previously his top position representing 43.85% of his equity portfolio.

Jack Ma, Chairman of Alibaba Group Holding Ltd

Zheng founded the Hong Kong-based Keywise in 2006 after previously co-founding and managing Neon Liberty Capital Management and acting as the vice president and portfolio manager at the JP Morgan Emerging Market Equity Group prior to that. Keywise focuses primarily on companies in the Greater China market, including mainland China, Taiwan, Singapore, and Hong Kong. In particular, the fund focuses on under-researched companies with high growth potential. Keywise manages two main funds, the Penguin Development Fund and the Pheonix Development Fund.

Hedge funds and other big money managers like Zheng prefer to have the largest amounts of their capital invested in large and mega-cap stocks because these companies allow for much greater capital allocation, which is important taking into account that the global hedge fund industry has swollen to nearly $3.0 trillion. That’s why if we take a look at the most popular stocks among funds (we track more than 700 in our database), we won’t find any mid- or small-cap stocks there. However, our backtests of hedge funds’ equity portfolios between 1999 and 2012 revealed that the 50 most popular stocks among hedge funds underperformed the market by 7 basis points per month. On the other hand, we found that we can combine the pricing inefficiencies among small-cap picks with hedge fund expertise and obtain significant results. This was confirmed through backtesting and in forward tests of our small-cap strategy since 2012. The strategy, which involves imitating the 15 most popular small-cap picks among hedge funds managed to provide gains of more than 137%, beating the broader market by over 82 percentage points through the end of March (see the details).

Having parted ways with his large Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) holding, International, Ltd. (ADR) (NASDAQ:CTRP) has moved into the top position in Zheng’s U.S equity portfolio. Despite his big first quarter, Zheng is likely kicking himself for selling off 82% of International, Ltd. (ADR) (NASDAQ:CTRP) holding during the fourth quarter, as it returned a stellar 28.84% during the first quarter. Zheng did add back onto the position last quarter, increasing it by 37% to 216,065 shares, which coupled with its big gains, vaulted the value of the position to $12.67 million and the top of his portfolio. Positions in International, Ltd. (ADR) (NASDAQ:CTRP) helped several other funds to big quarters, including fellow Hong Kong-based billionaire Lei Zhang’s Hillhouse Capital, JAT Capital, Hound Partners, and Jason Karp of Tourbillon Capital, who’s been a big fan of dating back to last year.

Vipshop Holdings Ltd – ADR (NYSE:VIPS) was another big performing stock during the first quarter, returning slightly more than 50%. The Chinese online retailer of discounted brand name products has had a monumental run since its U.S IPO in early 2012, gaining more than 5,000% as it’s soared from just $0.55 to over $28.50. Zheng played his cards right on Vipshop Holdings Ltd – ADR (NYSE:VIPS), increasing his position by just over 100% during the fourth quarter and then taking some profit from the position by selling off 38% of it during the first quarter. That left Zheng with 413,070 shares valued at $12.16 million, his second-most valuable position. Vipshop Holdings Ltd – ADR (NYSE:VIPS) is the top holding of Horseman Capital entering Q2, the largest shareholder of the stock in our database.

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