Deep Dive: Low-Net Equity Fund Part 1
Category 1: Strategy Fit & Opportunity Set → 5/5
Alignment with portfolio objective
As previous articles have outlined, the hedge fund portfolio aims to remain uncorrelated with the equity index (using SPX as a reference), seeking index-level returns at lower risk levels1. Each fund within the portfolio must individually satisfy defined return, risk, and diversification benchmarks. We can now pitch fund’s past five years’ performance against the specific criteria we have established:
While the Sharpe ratio underperforms our requirement, this is sufficiently offset by the fund's exceptional returns and beneficial negative correlation and beta. Therefore, incorporating this fund into the hedge fund portfolio is accreditive.
Quality and Persistence of Alpha Opportunity
The fund belongs to the low-net equity hedge fund category, emphasizing semiconductors and electronic hardware with a fundamental and value-oriented approach.
Its opportunity set centers around Asia's semiconductor and electronics supply chain, with a dual focus on mature-node semiconductor leaders in China and global advanced-node specialists. The fund capitalizes on four key structural trends: China's mature-node semiconductor substitution (supported by policy tailwinds and supply chain de-risking), secular digitization driving semiconductor demand (via EVs, automation, and cloud infrastructure), growing AI infrastructure needs (creating shifts in server-class semiconductors), and opportunistic exposure to Chinese Internet companies with AI potential that offer asymmetric upside during sentiment re-ratings.
The fund maintains tactical flexibility to adjust investments among upstream (materials, foundries), midstream (fabless, packaging), and downstream (consumer electronics, autos) segments. However, its core competitive strength remains in generating alpha through specialized hardware technology insights across Asia.
The richness and persistence of alpha in this segment are underpinned by a rare combination of forces: the rapid pace of technological change driven by AI advancement, the technical difficulty and high specialization inherent to semiconductor investing, and the deep cyclicality of the supply chain. These dynamics make real-time, granular supply chain data an enduring source of edge—something generalist investors often lack. This allows specialist hedge funds like this one to trade effectively across cycles, uncovering both structural and tactical mispricings throughout the ecosystem. As long as these structural characteristics remain in place, the alpha opportunity is likely to remain both repeatable and deep.
Strategy Differentiation and Edge
This strategy stands apart from U.S.-centric peers by focusing on mature-node semiconductors and the broader Asian supply chain. In contrast to the highly efficient and well-covered U.S. fabless ecosystem, Asia, particularly China, remains significantly more inefficient, allowing room for meaningful long-short dispersion and sustained information advantages.
The fund's key competitive edge stems from its integration of proprietary data and deep domain expertise. Its proprietary data platform is the best I have seen among its peers. It consolidates on-the-ground channel checks and expert insights from Taiwan, China, Japan, Korea, and India to form a complete end-to-end supply chain visibility. It also tracks capital flows and investor positioning to anticipate turning points. Complementing this data advantage is the fund's domain-driven portfolio management approach, which demonstrates depth in semiconductor sector specialization, employs a contrarian, data-backed investment process, and has proven its ability to evolve and improve—notably by reengineering risk systems after past drawdowns to adapt to shifting market regimes.
Market environment sensitivity
Prior to 2020, the strategy maintained high net exposure to China, resulting in significant beta and correlation to the MSCI China Index. During this period, macro and index-level moves overwhelmed the fund’s otherwise stock-specific alpha, especially in hardware semiconductors. However, following the change in portfolio manager in late 2017, the strategy began a deliberate reduction in net exposure through enhanced hedging discipline.
Since 2020, net exposure to China has been stabilized around 30%, allowing the strategy to become increasingly insulated from the volatile swings of the China equity complex. This evolution is visually confirmed by the Component Variance (ComVar) analysis, where the idiosyncratic contribution to volatility has approached near 100% in recent years. This shift reflects the growing dominance of true stock selection alpha, independent of uncontrollable macro factors, marking a structural improvement in the strategy’s design and resilience.
Capacity discipline
Since 2020, the fund has steadily grown its assets under management from approximately $700 million to over $1.4 billion, effectively doubling over five years. This growth has been largely driven by performance, with consistent net dollar returns accounting for most of the increase. Net inflows have remained moderate and measured, suggesting a stable investor base and a disciplined approach to scaling capital.
The manager estimates strategy capacity at around $3 billion, which puts the current AUM at under 50% of that threshold, leaving substantial room for further growth without risking capacity-driven performance degradation. For context, another top-performing Asian peer operates at $4.2 billion in AUM respectively, reinforcing that this strategy is still comfortably within scalable bounds.
In the next post, we'll continue going through the other categories in our DD framework. Stay Tuned.
From September 2020 to May 2025, the S&P 500 delivered an annualized return of 13.8% with annualized volatility of 16.0%. This represents an exceptionally strong period of performance, significantly outperforming the prior five-year period, which saw an annualized return of 11.1% and volatility of 14.7%. The outperformance was primarily driven by forward earnings multiple expansion—from 15x in 2015 to 23x in 2025.