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

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, Ctrip.com 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 hisCtrip.com 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 Ctrip.com 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 Ctrip.com 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.

YY Inc (ADR) (NASDAQ:YY) did not enjoy the same strong first quarter as its aforementioned compatriots. Shares of the Chinese online social platform, which engages users in a variety of group activities, declined by 12.46% during the quarter. The stock has made up those losses in April however, thanks in part to Chinese government stimulus measures which have bolstered the sentiment of many Chinese stocks. Zheng increased his position in YY Inc (ADR) (NASDAQ:YY) by 87% during the first quarter to 169,400 shares valued at $9.24 million. Despite being well down from its 2014 high of over $90, shares are still up by more than 450% since its late 2012 U.S IPO. Philippe Laffont’s Coatue Management held the largest position in YY Inc (ADR) (NASDAQ:YY) entering 2015, among the funds we track.

Zheng was one of three fund managers to open a new position in Noah Holdings Limited (ADR) (NYSE:NOAH) during the fourth quarter, which increased fund ownership in the Chinese financial services company to six from four. After a solid first quarter in which it returned 11.87%, Noah Holdings Limited (ADR) (NYSE:NOAH) exploded like many other Chinese stocks in April, gaining over 46% during the month. While Zheng decreased his holding in Noah by 20% during the first quarter, he still maintained 349,533 shares valued at $8.17 million. With the stock’s big April, it has now jumped close to the top of Zheng’s portfolio. Billionaire Ken Griffin has a small position of just under 50,000 shares of Noah Holdings Limited (ADR) (NYSE:NOAH).

Lastly we come to Alibaba Group Holding Ltd (NYSE:BABA), formerly Zheng’s third choice, now down to sixth after he decreased the position by 68% during the first quarter, and shares of Alibaba also tumbled by nearly 20%. Zheng held 32,153 shares of the Chinese e-commerce giant, which were valued at $2.68 million. Alibaba Group Holding Ltd (NYSE:BABA) has not had the same strong April as many other Chinese stocks, dipping slightly during the month as investors cautiously await its May 7 earnings report. There are worries that Alibaba Group Holding Ltd (NYSE:BABA) will again miss estimates, with stricter rules against fake merchandise on the company’s Tmall platform likely to negatively affect sales. That would be bad news for Alibaba bulls like billionaires Dan Loeb and Rob Citrone. Other analysts however feel the stock is hovering around its short-term bottom and that it could appreciate by as much as 30% by the end of 2015.

Disclosure: None

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