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Senrigan Capital: Philosophical Difference

A true hedge fund manager, Senrigan Capital Group founder Nick Taylor pursues event-driven opportunities in Asia without taking market risk.

In hindsight, Nick Taylor’s timing could not have been worse. The British trader’s troubles began in July 2008, when he joined U.S. hedge fund firm Citadel after quitting a nine-year post at Credit Suisse.

A specialist in event-driven strategies who had spent much of the decade in Asia, Taylor had plenty to lose by leaving Credit Suisse, where he ran the bank’s London-based internal hedge fund. He made the move at the urging of Citadel founder Kenneth Griffin, who had personally pursued him. Griffin rewarded Taylor by letting him bring most of his team from Credit Suisse and quickly putting him in charge of Chicago-based Citadel’s expansion into Asia.

But as the Japanese-speaking Taylor’s responsibilities grew, so did Citadel’s dizzying losses from the financial crisis. With its two flagship funds on their way to finishing 2008 down 55 percent, the firm cut back in Asia, a decision that included shutting its Tokyo office and exiting event-driven investing. In December of that year, Taylor and his team found themselves jobless in Hong Kong.

Taylor, 42, excels at profiting from mergers and other happenings in the corporate world, but suddenly he was driven by a very different set of events. Luckily, he’s resourceful. Before switching to finance, the Manchester native had left his economically troubled hometown to become a philosophy lecturer at the University of Oxford.

In early 2009, Taylor bounced back by founding Senrigan Capital Group, an event-driven shop where he serves as CIO. He and the crew that had followed him to Citadel, and then to Senrigan, raised serious money at a time when seeding for Asia-based hedge fund start-ups had all but vanished. Thanks to a $150 million investment from Blackstone Alternative Asset Management, Senrigan was the biggest Asian hedge fund launch since 2007.

In his sunlit 15th-floor office in Hong Kong’s Central District, Taylor notes that, unlike most Asia-based hedge funds, Senrigan doesn’t believe in taking market risk.

“We’re not trying to be Asia growth or Asia value or Asia beta,” says the lithe Englishman, whose dark eyes appear to miss nothing. “We’re trying to find unusual and odd processes and dig into them in incredible depth and find anomalies, find things that are missing, find things that aren’t priced properly — and take those risks instead.”

The response from investors has been dramatic. Senrigan — whose name is Japanese for “the eye that can see for 2,500 miles” — is already one of Asia’s largest hedge fund firms. As of March 1 its Senrigan Master Fund had reached $945 million in assets.

Like its competitors, Senrigan is capitalizing on a renewed appetite for Asia-focused hedge funds. But Taylor has some advantages that set him apart: a first-class investment pedigree, an intimate knowledge of the region and a steadfast refusal to ride the Asian dragon. A true hedge fund manager, he makes money in all seasons by exploiting overlooked inefficiencies rather than betting on the market rising or falling.

Investors speak highly of Taylor. Signet Group, a U.S.- and U.K.-based fund-of-hedge-funds firm that manages $1.7 billion for pension funds, endowments and other institutional clients, began investing with Senrigan in February 2010. The point person for this allocation is François Hora, who heads Signet’s Hong Kong office.

Describing the Senrigan founder as “highly intelligent,” Hora was impressed by Taylor’s track record and the Blackstone coup. “As a person, what comes across is that he’s demanding,” Hora says. “He demands a lot of himself and his employees.”

Senrigan is part of a rush on Asia, where the economic growth of China and other countries is proving irresistible. Asian hedge funds have recovered from the dark days of 2008, when they were hit with massive losses and redemptions. The HFRI emerging markets Asia ex-Japan index plunged 33.5 percent that year, then climbed 37.5 percent in 2009. Last year it gained 11 percent, in line with the HFRI fund-weighted composite index.

Including performance gains, the total assets of Asia-focused hedge funds reached $83.4 billion in 2010, according to Chicago-based Hedge Fund Research. A $6.6 billion gain over the previous year, it was the largest annual increase since 2007, when total assets peaked at $111.4 billion.

Assetwise, Asian hedge funds haven’t rebounded as smartly as the global industry, which managed a near-record $1.917 trillion in the fourth quarter of last year. But there have never been more hedge funds dedicated to Asia. In the fourth quarter of 2010, according to HFR, they reached an all-time high of 1,041.

Through its strategy, Senrigan stands out in this crowded field. Taylor, who speaks quietly and discursively, says there are two reasons now is the right time to pursue event-driven investing in Asia. The first is the sheer number of live deals. “The deals aren’t always simple and straightforward, and so you get paid for knowing what you’re doing,” he adds.

The second is a lack of competition. Event-driven hedge funds may be a fixture in the U.S. and Europe, but they’re still a novelty in Hong Kong, where Senrigan was one of the early players. Still, Taylor has had to convince investors that Senrigan does things differently.

“Long-short in Asia has a reputation for really just being long,” he says. “Event-driven — certainly as we define it — is trying not to be directional. I think that has resonated with investors who want Asia exposure but don’t necessarily want market exposure.”

Meanwhile, many global hedge fund firms have left Hong Kong since the financial crisis. Then there are the banks, most of which have scaled back on risk and shrunk their prop trading desks. “The amount of proprietary capital that’s deployed right now in equity and event is an incredibly small fraction of what it once was,” ?Taylor says.

Though Asian event-driven hedge funds are relatively scarce, they’re attracting keen investor interest. In the fourth quarter of 2010, just 7.8 percent of Asia-focused hedge funds pursued event-driven strategies, according to HFR, compared with 13 percent for the global industry. But with 13.4 percent of total Asian assets, event-driven funds claimed a disproportionate share.

In Taylor’s experience, the best environment for event-driven is one with a reasonable amount of predictability, as long as it’s hidden from plain view. Uncovering this predictability means penetrating different cultures and legal systems, he says. While a given country’s legal system is fairly easy to decode, culture is a thornier problem.

“That is what is expected of a company, how a company is viewed by the people and the politicians and all the relevant players in that country,” Taylor says. “All of those things are very, very hard to get at from outside.”

In Asia, Taylor is anything but an outsider. He’s married to the place. While working at Goldman Sachs Group’s New York office back in 1996, he met his Korean-American wife, who had immigrated to the U.S. as a child. Both of the couple’s children, a three-year-old son and a daughter approaching her first birthday, were born in Hong Kong. Although that city is home now, Taylor talks wistfully of Tokyo, where he opened a Credit Suisse office in 2004.

Given his time on the ground, Taylor is well aware that Asia is not one place, but many. To him, taking a wholesale investment approach to this wildly diverse region is counterproductive. That’s why Senrigan focuses on just three markets from its sleek gray trading floor: mainland China, Japan and Australia. Big markets with a prevalence of cross-border deals, these nations also mirror the cultural backgrounds of the firm’s 19-member staff, which includes native Cantonese, Japanese and Mandarin speakers. Making up Taylor’s core investment team are partners ?Yasutaka Kuga of Japan, Hong Kong native Kevin Kwong and Taiwan-born Julia Tsai, along with principals Pontus Wachtmeister of Sweden and American Daniel Wolff. Dressed in an open-collared white shirt, gray pants and scuffed loafers, Taylor doesn’t stand on ceremony. At Senrigan, where everyone works on the same portfolio, he encourages his colleagues to share ideas and voice their opinions.

Seeking events, Senrigan casts a wide net. Much of its business is in what it calls corporate actions, including mergers and tender offers. Outside of merger arbitrage, the firm is on the lookout for catalysts such as joint venture announcements. It also watches for corporate structure trades — often involving merger securities — and special situations like fraud and lawsuits.

To get a better sense of how individual stocks behave when markets fall apart, Senrigan has examined every publicly announced deal from the crash of 1987 to the 2008 crisis. Grouping them into four categories — mandatory bids and three kinds of voluntary bids — the firm has built risk curves to show what happens to deals during major meltdowns and lesser market upsets. This ambitious research project helps it estimate and hedge crash risk.

Among other deals over the past year, Senrigan cleverly gained exposure to the initial public offering of a Taiwanese company that is the top supplier of touch screens for the iPad and iPhone. In Australia it took advantage of a media holding company’s stock buyback by cashing in several million shares at a two-year high. And in Japan, Senrigan profited when Panasonic Corp. privatized a subsidiary.

Launched in November 2009, the Senrigan Master Fund finished 2010 up 5.85 percent, according to investors. That may not sound impressive, but the fund’s daily beta was an astonishing 0.04 percent, making good on Taylor’s promise to avoid market correlation. And reflecting his caution for much of last year, daily volatility was just 4 percent — half of Senrigan’s target.

In Asia and elsewhere, last year didn’t turn out to be the blockbuster M&A year that many had expected, Taylor concedes. For five or six months in mid-2010, he says, the euro sovereign crisis and U.S. quantitative easing triggered memories of 2008. As a result, companies were reluctant to act.

According to Dealogic, announced Asia-Pacific M&A deal volumes reached $657.3 billion in 2010, an 18 percent increase from the previous year but well below the $730.3 billion total for 2007. But deal volume may be picking up. During the first eight weeks of 2011, announced Asia-Pacific deals totaled $72 billion, compared with $55.8 billion during the same period in 2010.

Senrigan is also poised to take advantage of a new spate of outbound deals by Chinese companies and state-owned enterprises. Whereas China used to stick to raw materials like coal and oil, Taylor explains, it’s now chasing food, technology and distribution networks. “Our thesis has always been that the Chinese aren’t going to stop at buying stuff under the ground; they’re going to buy stuff over the ground,” he says. “Everything that China wants, they’re going to eventually go after.”

Taylor’s colleague Tsai, who has dealt with Asian M&A for more than a decade, says Chinese buyers are shrewder and more quality-conscious than they were a few years ago. “Because they got burned a little bit in their buying binge in ’08,” she explains, “now there’s a bit more afterthought: ‘Do we really want to do this?’?”

If its own structure is any indication, Senrigan plans to be around for the long haul. Signet’s Hora praises the firm’s strong operational setup, including its risk management, and the segregation of duties among team members.

With double the staff of the average Hong Kong hedge fund, Hora says, Senrigan is at the forefront of the local industry’s move toward institutionalization — a fact not lost on hedge fund investors who had previously allocated little to Asia. “Funds of the institutional size and operational standard of Senrigan provide a lot of comfort to investors from Europe and the U.S.,” Hora adds.

The Senrigan strategy is another draw for Signet. As Hora explains, most of his firm’s assets are in fixed-income investments, which it favors because they mature at some point. Taylor’s focus on opportune events aligns with Signet’s goals by assigning a maturity to a trade. “His ability to identify those events and to hedge out the market risk around them, and to only keep the upside of the actual event, is what we’re looking for,” Hora says.

AS A TEENAGER, NICK TAYLOR had no plans to attend university, let alone to run a hedge fund firm. In fact, nothing about his upbringing suggested he would ever find his way into international finance.

Taylor was born and raised in the Manchester area, where his parents worked in art education. Like many of his friends, he left high school at 16. The year was 1984, and unemployment in northern England, which had borne the brunt of British job losses in the recent recession, hovered around 30 percent.

“It was a very difficult time in the U.K., for social-class, economic and political reasons,” recalls Taylor, whose fonder memories of the Margaret Thatcher era include concerts by Manchester legends New Order and the Smiths. (A fan of early-1980s guitar groups, he plays six-string in a Hong Kong cover band.)

After spending a year working in government training schemes for unemployed youth, Taylor enrolled in a local sixth-form college (a U.K. learning institution at which high-school-age students can earn their university prerequisites). His only goal was to sit things out for a couple of years until he could find a real job. But then, to impress a girl he liked, Taylor took an after-school philosophy class. Recognizing his talent, the instructor said she would write him a reference to study philosophy at Oxford or the University of Cambridge.

Just hearing the names of those elite institutions left the young Taylor seething with resentment. But when his college refused to provide references and tried to dissuade him from applying to Cambridge and Oxford — on the grounds that none of its students had ever darkened the door of either school — he took it as a challenge. “That was all I needed to hear, really,” he says.

In 1988, Taylor passed the admission exam and interview for Cambridge, where he studied at Robinson College under the renowned moral philosopher Sir Bernard Williams. He also worked with John Dunn, now emeritus professor of political theory at King’s College. Dunn says Taylor was the most searching and exacting pupil he ever had.

“Nick was a really, really blazingly clever and independent and alive figure,” recalls Dunn, describing Taylor as exciting to explore ideas with because he thought so hard and had so much energy. “He was very politically skeptical and very, very impatient with the power that was in society.”

Dunn, who has stayed friends with Taylor, wasn’t surprised when his former student moved into banking. “He was extraordinarily interested in the world and how it worked and what made it work,” says the Cambridge don, a visiting professor in the Graduate School of Social Sciences and Humanities at Japan’s Chiba University. “Those sorts of intellectual preoccupations are very pertinent to thinking about large financial magnitudes and causation.”

Taylor graduated at the top of his Cambridge class and received a prestigious British Academy scholarship to pursue a doctorate in philosophy at Oxford. There he became the first person to win a Jowett senior scholarship in the first year of graduate studies. In his fourth year, Taylor began lecturing.

Twelve months later he left Oxford. His £11,000 ($17,000) teaching salary wasn’t the only reason. Afraid of becoming complacent, he also worried about his long-term career prospects as a philosophy professor. He decided to study law, which combined philosophy’s rational presentation of ideas with his passion for justice. But first he needed to raise some cash for tuition. “So I thought, ‘I’m going to get one of those terrible jobs in finance that I’m sure I won’t like.’?”

As Taylor admits, luck was on his side. To land a job, he wrote what he calls naive applications to investment banks and read stacks of books on options. Only one firm granted him an interview — Goldman Sachs, which hired him in 1996 as an associate on its London risk arbitrage desk.

Taylor says it took him a while to appreciate his good fortune. When he started at Goldman, few banks or large hedge funds were doing risk arbitrage in continental Europe, which was perceived as a difficult place linguistically and culturally. For traders like Taylor who made the effort, those obstacles created opportunities for healthy excess returns.

“The processes, the legal systems, the events that took place in companies — there was a huge amount of predictability, if you knew where and how to look,” he says. “But it was hard to discover that predictability. Languages, familiarity and types of disclosure were unfamiliar to most U.S.-based arbitrage managers.”

After three years at Goldman, Taylor was hired away by Credit Suisse, where he was named a director in 1999. Robin Macdonald, then the bank’s head of European equities, put him in charge of a small European risk arbitrage desk. A Goldman alumnus who also had taught philosophy, Macdonald says he hired Taylor for his analytical skills, his intuition and his relative maturity.

“He’d come to the business a little bit later than most people,” notes Macdonald, now an independent investor who lives in Thailand. “I think that was also an advantage.”

In early 2000, Taylor helped launch a Credit Suisse subsidiary called Modal Capital Partners. Led by Macdonald, this London-based internal hedge fund did European event-driven, statistical and long-short trading.

However, Modal faced mounting competition in Europe — a situation that would set the stage for ?Taylor to move to Asia. Looking back, he says several events between 1996 and 2000 conspired to make European risk arbitrage more popular. First, hedge fund capital grew dramatically and started internationalizing. As many firms opened London offices, banks began dedicating people to serving them. Second, freer flow of information gave the original European event-driven players less of an edge. “That was the opening of what we did to a wider audience,” ?Taylor says.

Third, in 1999, U.K. mobile phone maker Vodafone Group succeeded in its $183 billion hostile bid for German telecommunications and engineering giant Mannesmann. Because a hostile cross-border European bid had previously been regarded as impossible, this transaction opened people’s eyes to M&A opportunities in the region, Taylor says. All of a sudden, Europe was thrown wide-open.

Fearing for the future of his business, the then-31-year-old Taylor made an exploratory trip to Hong Kong and Tokyo in December 2000. His first impression of Asia was that, for an event-driven investor, it closely resembled mid-1990s Europe. “?‘It’s opaque, it’s difficult, it’s culturally problematic from the outside, but there are lots of companies doing interesting and, from an outside perspective, unusual things,’?” Taylor recalls thinking. “?‘There isn’t a huge institutional buy or sell side here. With the right people, it should work.’?”

But Taylor soon realized the futility of tackling Asia as a whole. Despite low taxes and an English-speaking business culture in Hong Kong, he saw little upside in a place that was then home to few companies with market capitalizations of more than $1 billion. Worse, he found there was no depth of research because the buy side dabbled in a variety of Asian countries.

Japan looked far more promising, not least because of its high barriers to entry: a troubled economy, a tricky language and a challenging regulatory regime for foreign investors. It was also, and still is, the world’s second-most-liquid market, with thousands of listed companies. And critically, Taylor says, Japan is one place: “Any country is difficult to access from the outside, but one country should be easier than five or seven or ten.”

Deciding to concentrate on Japan, Taylor spent three and a half years learning its language and everything else he could about the country. In early 2004 he opened a Credit Suisse office in Tokyo. Although he still ran his London business, he began spending at least six months of the year in Asia.

Taylor, who was named CEO of Modal in 2005, soon laid the groundwork for Asian expansion. He hired people from Hong Kong and countries such as Malaysia, South Korea and Taiwan, training them in Japan on the understanding that they would focus on their native economies. Taylor opened a Hong Kong office in 2006 and moved there the following year. By 2008, Modal had 18 people on the research side, 14 of them in its two Asian branches.

That’s when Taylor and 12 members of his team defected to Citadel. The hedge fund firm had made overtures to Taylor four years earlier, but it wasn’t until 2006 that a headhunter talked him into meeting with founder Griffin. Taylor came away impressed by Griffin’s intellect and willingness to listen. Griffin returns the compliment: “Nick is tremendously insightful about financial markets and has a real passion for investing.”

On a visit to Chicago, Taylor was awed by the sophistication and focus of the Citadel operation. Still, he turned down two offers from Griffin, only to relent in the fall of 2007. During his brief stay at Citadel, Taylor sat on the management committee and oversaw international principal investments. By October 2008 he was managing all of the firm’s Asian business outside of private equity.

He was disappointed to leave Citadel so soon, especially given that his team had been performing well. But Taylor — who uses Omnium, Citadel’s administration platform — notes that his former employer has been nothing but helpful since the departure.

Cut loose, Taylor and company began gathering in Hong Kong cafés. They knew they wanted to stick together, but the question was what to do next. At a pivotal meeting in March 2009, they decided to launch their own shop rather than work for another big firm.

Taylor says it’s hard to remember how poor the fundraising environment was in early 2009. With no experience in attracting investors, the Senrigan team decided to commit $45 million of their own capital and set up an institutional-quality fund. Their hope: “Maybe at some point in 2010, people will start to think about Asia again,” ?Taylor says.

Fortunately, someone alerted the group that if Senrigan wanted to see any investment in 2010, it had better start wooing potential clients. A sales trip to the U.S. and Europe in the summer of 2009 went better than Taylor expected, resulting in the $150 million investment from New York–based Blackstone. Today the bulk of Senrigan’s investors are U.S. institutions.

One of just eight managers on Blackstone’s Strategic Alliance hedge fund seeding platform, Taylor didn’t go looking for that kind of financing. Before the Blackstone deal he’d been approached informally by several other seeders, one of whom suggested giving him $25 million for 25 percent of his firm.

Investors say that Taylor doesn’t delegate decision making lightly and that he’s familiar with every detail of the Senrigan portfolio. But that doesn’t mean he’s a micromanager. Principal Daniel Wolff, who has a BA in mathematics from the University of Chicago and has worked with Taylor since 2005, says the investment team spends significant time debating ideas. He describes Taylor as a charismatic and politically savvy leader who welcomes being challenged.

“He’s quite different from the other managers that I worked with at Credit Suisse, with the tie clip and the handshake and the Harvard Business School background,” says Wolff, who helped build and now oversees Senrigan’s infrastructure for viewing and analyzing risk. “If you raise an issue, he doesn’t take it as an affront to his identity.”

LAST AUGUST, SENRIGAN PARTNER Julia Tsai noticed that investors were very excited about the imminent IPO of Taipei-based TPK Holding Co., the first and main supplier of touch-screen technology for the iPad and iPhone. Senrigan seldom gets involved in IPOs, but in this case it was intrigued. The IPO price was pegged at about NT$210 ($6.60), but a brisk prefloat trade in company shares among TPK employees fed speculation that the stock would trade as high as NT$800 after it listed.

As Taylor explains, Senrigan had little chance of participating in the IPO. The offering was massively oversubscribed, and buying stock would mean first going through the complicated process of setting up an onshore securities account in Taiwan.

Still, Taiwanese native Tsai read the IPO prospectus, which was written in Mandarin. Tsai, who holds a BA in applied mathematics from Harvard University and worked as an M&A banker for Merrill, Lynch & Co. in Hong Kong and New York before joining Taylor at Modal in 2006, made a surprising discovery. One of TPK’s biggest shareholders was Balda Investments Singapore, which happened to be 100 percent owned by a publicly traded German manufacturing company called Balda. Bad Oeynhausen–based Balda had a market capitalization of $230 million. At an IPO price of NT$210 a share, TPK would have a total market cap of $1.34 billion, making Balda’s stake in the company worth more than its own market cap.

Senrigan realized it could gain exposure to TPK’s public offering by purchasing Balda shares in Germany. “We had a company where we could effectively buy that IPO in a relatively much bigger size than we could if we tried to take part in Taipei, at a huge discount,” ?Taylor says.

When Senrigan began acquiring Balda shares in August of last year, they traded at €3.30 ($4.10). Balda was the perfect buy for several reasons: The company was small, with no institutional research coverage and a mostly German shareholder base. Also, Taiwanese securities regulations prevented Balda from revealing anything about the TPK IPO. By late September, when Senrigan held 5 percent of the company, Balda was trading at €5.

Senrigan still faced the risk that TPK would postpone its October IPO if the Taiwanese market fell. To protect itself, the firm took out short-term option contracts on the broader Taiwanese indexes and on an index basket of technology stocks available as an exchange-traded fund. It also hedged its exposure to Balda through stakes in several of the company’s peers. As of March 1, Balda traded in the €8 range, while TPK stock was worth about NT$820.

The positions that Senrigan doesn’t take are equally revealing of the firm’s approach to event-driven investing. Last October, Bangkok-based coal producer and coal energy provider Banpu Public Co. acquired Australia’s Centennial Coal Co. for $1.7 billion. In its cash offer, Banpu gave Centennial shareholders a 40 percent premium on the company’s July 2, 2010, closing stock price.

However, one condition of the takeover was that if the Australian dollar reached 97 cents U.S., Banpu could walk away. Taylor says it’s easy to hedge such a risk with Australian dollars by purchasing an option to cover the losses should the deal collapse. But there was a catch: With Centennial, that option cost 4 percent, while the deal spread was about 3.8 percent.

When the Banpu-Centennial deal was announced in July, the Australian dollar was trading at 83 cents U.S. But within a couple of weeks, it had hit 90 cents and was strengthening rapidly. When Taylor raised the 97-cent clause with various Australian bankers, they directed him to the deal document, which described it in plain English as a condition that could be waived.

But as Taylor pointed out, the official independent financial adviser’s opinion that Banpu shareholders would refer to when they voted on the deal was written in Thai, and it clearly stated that if the Australian dollar got to 97 cents, the takeover of Centennial would not proceed. “The banks in Australia didn’t know that, hadn’t thought about it, and some were really annoyed to find it out, believing that it was a waivable condition,” Taylor says. “In reality, this created a conflict between two legal documents.”

Meanwhile, Senrigan’s competitors were buying Centennial stock. Rather than close its eyes to the danger, the firm sat on the sidelines. The day the deal closed, the Australian dollar was at 96.5 cents, and it went on to climb higher.

“If there’s a takeover and here’s all of the non-deal-related risks, if you can neutralize those risks and they’re not risks you want to take, you should neutralize them,” Taylor says. “If you want to take a bet on the Australian dollar, you can do that easily and much more efficiently than by buying Centennial.”

One recent Australian event that Senrigan did get involved in was a share buyback by Consolidated Media Holdings. In 2009, Australian tycoons James Packer and Kerry Stokes were battling for control of the holding company, which has stakes in several television properties, including pay-TV providers Fox Sports and Foxtel. In September of that year, the pair reached an agreement not to compete with each other for the next 12 months.

By the end of 2009, a 10 percent buyback had left Packer and Stokes with 44.6 percent and 22 percent of the company’s shares, respectively. On the May 2010 announcement of an additional 12.5 percent buyback, Senrigan started purchasing shares at A$3.10 ($2.90). It soon amassed a sizable position in Consolidated.

“Basically, it’s a company in the process of distributing the vast majority of its free cash through dividends or buybacks in order to reduce its free float so that it can eventually be taken out for a smaller outlay,” Taylor explains.

Consolidated bought back 21 million shares at A$3.25. In July and August 2010, the company stopped its buyback because it was in a blackout period before releasing financial results. The stock fell to A$3.08, and Senrigan took that opportunity to purchase additional shares, pushing its total to more than 7 million. After the buyback resumed in September, the firm waited until the number of outstanding shares dwindled to 25 million. Senrigan then sold its stake at a two-year high of ?A$3.35, earning a 9 percent profit over five months.

In Japan another recent deal offers insights into Senrigan’s hedging strategies and the challenges of investing in that country. From the beginning, the firm had traded Panasonic Electric Works Co., a subsidiary of Kadoma-based electronics giant Panasonic Corp. Taking the lead on Panasonic Electric Works were Taylor and Senrigan partner ?Yasutaka Kuga. An economics graduate of the University of Tokyo, Kuga spent nine years in M&A advisory at the Tokyo office of Morgan Stanley before joining Modal in 2004. In 2006 he returned to Morgan Stanley to launch its Japanese private equity business, only to reunite with Taylor at Citadel in 2008.

In late 2009, Taylor and Kuga began building a position in Panasonic Electric Works. They were fairly confident that early in 2010 majority owner Panasonic would announce a buyout through a share purchase. To manage its risk in the meantime, Senrigan had to do some hedging.

In anticipation of such a buyout, most traders simply hedge with the parent’s shares, Taylor says. But Panasonic Electric Works was a different animal from Panasonic; it specialized in components and systems for the Japanese construction market. Therefore the two stocks moved for divergent reasons.

Short-selling Panasonic would only be a hedge if it paid in shares for its subsidiary, Taylor says. The challenge was to remove risks such as style factors, whereby some stocks outperform others when momentum or value investing is in vogue. Also, hedging with Panasonic alone would have resulted in an unintentional dollar-yen bet.

For its hedge, Senrigan assembled a diversified basket of 33 Japanese stocks. Although the top weighting went to Panasonic, it accounted for just 8.3 percent. “We’re looking for all of the different factors that drive a stock’s performance and trying to clip most of them away and just expose the alpha piece — the idiosyncratic risk that we want to take,” ?Taylor explains. “Alpha isn’t an unattached property that you can just buy.”

In January 2010, Panasonic unveiled a home-focused strategy for meshing its high-end electronics with Panasonic Electric Works’ products. For Senrigan, this was a signal to the market that integration of the two companies was near.

But there was no announcement on the buyout of Panasonic Electric Works. Senrigan abandoned its position in March, when Panasonic president Fumio Ohtsubo indicated that a full takeover wasn’t in the cards. Panasonic Electric Works’ stock rose and fell, partly in response to a subsequent statement from Ohtsubo that there would be no buyout in the next three years.

Betting the takeover would happen soon despite those mixed messages, Senrigan rebuilt its position. In late July, Panasonic announced it was acquiring 100 percent of Panasonic Electric Works and fellow subsidiary Sanyo Electric Co. through a cash tender and share swap.

The tender price for Panasonic Electric Works was ¥1,100 ($11.40) a share, a 7.6 percent premium on the six-month stock price. Senrigan made money, but it didn’t capture any synergies from the transaction. “A lot of care needs to be taken in parents’ acquisition of subsidiaries due to the lack of an independent board, the low thresholds for shareholder approvals and the lack of a concept of aligned investors in law,” ?Taylor says of Japan.

As a minority shareholder, Senrigan had unsuccessfully tried to secure a better tender price by politely asking Panasonic Electric Works to reconsider. No fan of activist investing to begin with, Taylor says bullying Japanese companies doesn’t work. “Our attitude to Japan is that it’s a unique place,” he explains. “We might prefer it to operate differently, but it doesn’t, and so let’s understand how it works, respect it, and let’s operate over time as best as we can within those constraints.”

Likewise, Senrigan will keep trying to figure out China. On the M&A side, partner Kevin Kwong says, the country is just getting its regulatory act together. China’s inner workings will grow clearer, predicts Kwong, who has a BA in economics from Yale University and did event-driven investing at Lehman Brothers Holdings in Tokyo before moving to Modal in 2004. “If you’re involved in this landscape from the beginning, just imagine the knowledge base you’re going to build up.” Senrigan is also planning to open a Tokyo office later this year.

Taylor has his eye on Chinese outbound deals with Europe, the one part of the world with little in the way of foreign investment review. As he notes, China has defused criticism there by purchasing debt in countries like Greece and Spain.

Senrigan may also do more work in Malaysia, which has seen a surge in deal activity over the past several months. “Where we’ve got the right amount of local expertise, we might add other Asian countries,” Taylor says. “But we’ll never do a wholesale approach in Asia. Asia is not a unit of analysis.”

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