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5 Questions on China with Sunrise’s CEO Jason Gerlach

Mar 20, 2017

For this post, we interviewed Jason Gerlach, CEO and Managing Partner of Sunrise Capital, to discuss his firm’s approach to investing in China.

Sunrise is a pioneering asset management firm that is now in its 38th year of alternative investing. Founded in 1980, Sunrise offers a range of tactical macro investment solutions for individual and institutional investors alike. Applying nearly four decades of investing experience to markets around the globe, Sunrise builds investment solutions designed to provide compelling risk-adjusted returns and downside protection in times of market crisis.  To learn more about Sunrise, contact them at info@sunrisecapital.com.

Many US investors look at investing in China as a binary decision: either they want exposure to the country, or they don’t. Why look at China from a sector perspective?

To us, the thought of excluding China entirely from a balanced investment portfolio makes no sense at all.  China is one of world’s largest and most diverse economies, a key driver of numerous industries and investment sectors, and as compelling a source of potential growth and opportunity as any nation on earth, particularly over the long term. Most investors will choose to not include China in their portfolio because it adds a lot of volatility but in our view, upside volatility can be tremendously beneficial and downside volatility can often been dampened sufficiently to make it more palatable to maintain China exposure in one’s portfolio at all times.

Given that our view is that one should always maintain exposure to China to some degree as opposed to taking a binary approach and sitting out of China for protracted periods of time, the question becomes one of how to most efficiently and effectively invest in China and achieve a compelling risk-adjusted return.  After years of research, our view is that the best approach to maintaining constant exposure to China is to tactically rotate across a diverse basket of China-related investments as opportunities with a higher probability of future gains emerge within that basket.  In doing so, we believe that over the long term, one can potentially capture a good portion of the upside potential of China while not exposing oneself to an undue amount of downside volatility.  Ultimately, that’s our broader investment thesis at Sunrise and we think it applies very well to China, just as it does to the opportunity set presented by any other large, industrialized nation.

Your strategy looks to actively rotate sector exposures in China. Can you explain how this process works and what are the potential advantages of this strategy?

Our strategy relies on the quantitative data generated by market activity (price, volatility, and more) to make decisions regarding which opportunities offer, according to our models, the best chance of positive outcomes and which opportunities offer the least chance of positive outcomes.  On a periodic, intra-month basis, our China approach will re-weight its allocation based upon changes in the quantitative data (rising or falling prices, changing patterns of volatility, and more).  Depending on the market environment at hand, the re-weighting process may lead to significant portfolio changes or it may not result in any portfolio changes.  The goal of the continual re-weighting process is twofold.  First, where there is opportunity to capture upside, we want to capture as much of that upside as responsibly can.  Second, to the extent there is downside risk, we want to mitigate it as much as possible without unduly compromising our ability to capture upside potential. These goals are the foundation of our investment approach.

With respect to China, we believe that a major key to success is having a disciplined methodology that first, seeks statistically significant conditions that result in positive future return skew and second, allocates disproportionally to the opportunities that offer strong potential opportunities for positive skew. In the end, our mission is to deliver a compelling, long-term, risk adjusted return from the Chinese opportunity set that avoids the kinds of outsized downside volatility spikes that often drive investors to liquidate their entire investment and going forward, miss out on significant future opportunity.

Much has been documented about China’s shift from a manufacturing powerhouse to an economy increasingly powered by consumption and services. What’s the value in including China’s ‘old economy’ sectors, like Materials and Industrials, in your strategy?

While it is true that China’s economy is in the midst of the shift that you describe, that does not mean that there is still not opportunity to be found in sectors such as materials and industrials at certain points in time presently and in the future.  Like any economy, China is in a constant state of evolution that will undoubtedly ebb and flow in directions we cannot even imagine today.  Chinese investments tend to have outsized movement in both positive and negative directions so in our view, the key is to try to capitalize as much as possible on the positive movements and to dampen the downside risk of the negative movements. Instead of trying to guess what is going to happen next and make aggressive fundamental calls like many discretionary investment strategies tend to do, our approach reacts to real-time, often subtle changes in the quantitative data being generated by Chinese markets and ensures that whatever shifts occur, we and our investors are in a position to potentially capture upside from those shifts (and mitigate downside from those shifts as well).  Within our approach, all sectors are always considered and all data from those sectors contain valuable information that helps inform our investment decisions.

Are there fundamental differences between the momentum exhibited in the Chinese stock markets versus the United States?

We have studied and invested in global markets for nearly 40 years and ultimately, more often than not, markets will do what markets will do, whether they are in China, the U.S., or elsewhere.  All markets can act extremely bullishly, all markets can act extremely bearishly, and all markets can act in an almost endless number of patterns in between.  That being said, because Chinese stock markets are much less mature than those in the U.S. and because of other differences in the cultures and economies of the two nations, we do sometimes see some significant distinctions between the markets.  For instance, generally speaking, Chinese markets tend to ebb and flow more violently than U.S. markets and tend to exhibit a bit more “skittishness” than their U.S. counterparts.  This distinction requires investors to sometimes take slightly different investment approaches to each nation’s markets in order to capture sufficient opportunity and not be prematurely knocked out of investments.  Therefore at the heart of our approach is an experience-based methodology for measuring the timing and magnitude of Chinese market shifts and capitalizing on those shifts wherever possible. Indeed, capitalizing on investment variations among markets is one of our firm’s specialties and a key reason behind why we’re still standing nearly four decades since our 1980 launch.

What are you working on for future developments to your strategy for this market?

Our ongoing research and development effort is focused on diversifying our investment approach to include more neutral and bearish options in the portfolio in times when no Chinese investment opportunities show particular promise.  The goal is to ensure that the portfolio is only exposed to markets when there is a very good reason to believe that selected markets within the basket will rise.  When that is not the case, the portfolio will become defensive by allocating either to cash or less correlated assets that offer a potential for upside when the primary components of our China portfolio do not. We are also focusing our research on a real-time check that helps us identify times when our investments are breaking their typical behaviors in such a way that an alternative set of investment parameters becomes necessary.  Overall, because markets are constantly evolving, we continue to innovate aggressively just as we have since our 1980 inception.  Our investors deserve nothing less.

 

Disclaimers:

The preceding information has been prepared solely for informational purposes and is not an offer to sell or purchase securities or any offering of Sunrise Capital Partners LLC.  An investment with Sunrise is speculative, involves a substantial risk of loss, and is not suitable for all investors.  Any person subscribing for an investment with Sunrise must be able to bear the risks set forth in Sunrise’s offering materials.  Past performance results are not necessarily indicative of future results.

Category: Articles

Topics: China, Emerging Markets

Sunrise is not affiliated with Global X or SEI Investments Distribution Company (SIDCO).

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.  This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.

Investing involves risk, including possible loss of principal.

International investments may involve risk of unfavorable fluctuation in currency values, differences in generally accepted accounting principles, or economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO, 1 Freedom Valley Drive, Oaks, PA, 19456), which is not affiliated with Global X Management Company, LLC.