Cathy Dong, Director of Singapore-based LIG Capital, discusses how her team makes investments in the US and Asia. She also shares best practices for fund managers seeking to build relationships with family offices.
In this episode, Cathy and I talked about:
- How her team allocates to hedge funds, VC and PE.
- Important criteria required for fund managers to make LIG’s short list.
- The investment focus areas of interest to LIG Capital.
- How LIG is looking for more ‘interesting’ and differentiated fund managers.
- The importance of performance and positioning rationale during bear markets.
- The importance of ‘fit’ and getting to know what interests a family office.
- What NOT to do in the capital raising process.
3:43 | “First, I think you need to (ask) what are you achieving? Are you doing more wealth preservation or wealth growth? For us, I think our traditional business style, we are just very traditional. They’re all heavy assets, brick and mortar. But on the investment side, we’ve adopted a very aggressive approach. We have a higher risk profile actually.”
7:15 | “…we are looking at now more interesting fund managers. I believe we all have access to those big names or multi, multi-strat, or those platforms at the multi-billion size, either through banks or through just our investment approach. I think they are a good way to maintain because they just deliver what the market is doing …But for our, say next year outlook, for our allocation, we actually prefer more interesting fund managers or managers with more character. In that sense, you’re more differentiated from the others. ”
14:04 | “We talk to the fund managers, and see if they can explain clearly what they are investing or why they are investing. …I think why is more important than what.”
“And then the most important thing now, is how they perform in a bear market. …We actually care more about what’s your rationale in the bearish market.”
21:13 | “Some (fund managers) also approach us on LinkedIn. I think LinkedIn is a good way.
“You have to specify what makes you different. I think many fund managers, they just reach out to us, and they just give a lot of data, but it’s not really important when you reach to us. …It’s more like, why are you here? Or why do you think you are different? I think your position is very important.”
24:11 | “I think it’s about simplifying your strategy. Some managers use very complex terminology, or some calculation or methodology, and a lot of very complex things to explain, but people do not really understand. They do not feel you are sophisticated because they didn’t get you. It’s just better to simplify your strategies in three or five sentences and just summarize what your strategy is. I think that would be better.”
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This interview transcript has been edited for clarity.
Jennifer Bruno 00:11
Welcome to Hedge Interview. This episode is part of the Investor Views series, which features family offices, and other institutional investors from around the world. My guest today is Cathy Dong. Cathy is the director of LIG Capital, a Singapore-based single family office, backed by an American family with business in the US, Thailand and Malaysia.
She oversees investing across all asset classes in the US and Asia markets. Prior to her current role, Cathy has held director positions at three other family offices where she was similarly responsible for making allocations across various asset classes. Thank you for joining me today, Cathy.
Cathy Dong 00:58
Yeah, thank you Jennifer, for having me here.
Jennifer Bruno 01:01
Great. So I’d love it if you could tell us about your experience. It’s very interesting that you have such extensive experience allocating across multiple asset classes. So as noted, tell us a little bit about your experience in these global markets and across asset classes.
Cathy Dong 01:22
Yeah, for sure. I was born and grew up in China. I was educated in the UK, when I was around 17. So after that, I went to the US for work. My first job was in New York at a single family office. I was on the hedge fund side. We do have a fund of hedge funds, and we also have our trading team. It’s a small house, but I just picked up law.
Then I went to the west coast for a second single family office. And I was on the VC deep tech investment role. So basically investing in deep tech startups, early seed round, pre-seed round in Silicon Valley, hoping to bring them to Asia, something like the bridge between the east and the west.
And then one month before Covid, I joined a Middle Eastern family office. Because most of their investments are on the US and Europe, and plus the Covid years, I was actually stuck in different countries and have some different experience, but the majority of our investments are still in the US. In that house, I was more on the M&A and buyout role, more on the traditional business side.
Since April this year, I joined my current firm, which is my fourth single family office and backed by American property developer. Currently, we hold most of our operational business in Asia, mostly in Thailand, in Malaysia, and in US, we still have some. We are quite diversified.
Besides property, we also have some agricultural farming, we have some commodity essentials, and we are looking at some FMB business as well. In terms of our asset allocation, I will say it’s more like a comprehensive role. I look at both the public market and private market, both in funds and direct deals, depending on the different strategies.
Jennifer Bruno 03:23
Wow, that’s extensive. How do you determine your focus across all those different types of asset classes? How do you zero in and identify opportunities in such a vast area, in all those areas?
Cathy Dong 03:43
First, I think you need to (ask) what are you achieving? Are you doing more wealth preservation or wealth growth? For us, I think our traditional business style, we are just very traditional. They’re all heavy assets, brick and mortar. But on the investment side, we’ve adopted a very aggressive approach. We have a higher risk profile actually.
For us, right, we have six people around. Each of us has a KPI of about 10 to 12% cash return every year, so we have to achieve that target. It doesn’t matter where the return comes from. It can be an IPO, so you get the return or it can be an interest payment or it can be a dividend, whatever, but as long as you can achieve that return.
If you hit that return, you’re allowed to allocate to the other assets predominantly illiquid assets like PE, VC, buyout. For us, I think basically we have a stable return first, then we have a double, like a lower double-digit return as our basis then we can be more aggressive. So that’s our portfolio construction.
In terms of the specific asset allocation, assets, we invest around 70% into liquid assets, mostly funds. That’s including mutual funds, fixed income, hedge funds and private credit. The reason we regard private credit as a liquid asset is that because we require less than two-year lockup, and also quarterly distribution, or we can do quarterly redemption, so it’s very liquid.
And the other 30% we allocate to the illiquid assets — venture capital, private equity and buyout assets, both funds and direct use. But for VC, we’re more into funds. And recently that’s AI topic. For PE or growth or buyout, we’re more into traditional business, or you call your cash cow — so high growth, high margin and mass market. That’s our current portfolio.
And geography-wise, we’re still investing a little bit heavy in the US, around 60%, and 30% in Asia. India is our largest market inside Asia, followed by Japan, and then 10% in Europe, just because we do not have people in Europe. So it’s more by chance in Europe.
Jennifer Bruno 06:14
Okay, you mentioned something that I want to point out too, for our viewers. Something that I’ve heard before — is that family offices are typically in a capital preservation mode, or a capital growth mode. I guess, based on what you’ve said that you’re, you’re in a growth mode.
Cathy Dong 06:39
Jennifer Bruno 06:40
So your allocations reflect that. How do you zero in on the investments that you’re probably going to allocate to? How does that process typically happen?
Cathy Dong 06:59
Yeah, so you’re asking how (about) portfolio construction or how we catch the opportunities?
Jennifer Bruno 07:05
How do you evaluate opportunities? Or, what attracts you to something? What would catch your attention?
Cathy Dong 07:15
It depends on which asset class, right, so if you’re talking about hedge funds, that’s also where I spend most of my time this year, I evaluate around I think 40 or 50 hedge funds, globally. I think there are several takeaways, right? For one, for hedge funds, the lockup period (should be) no more than two years. I mean, usually they have one year of lockup, but sometimes they have two years or three years.
If they have a three-year lockup, we will negotiate and see if they can do a two-year lockup or something like that, because liquidity is really important for us. And you never know how the market will react for the two years, right? Especially now nobody can predict what is happening next. Yeah, so that’s for one.
Two, I think it depends on the return. If they are consistently generating a stable return. If you are only generating 7%, 8%, but you are consistently generating in that ratio, that’s fine. But if you are generating about like this year, let’s say 25%, and next, or maybe the year before you just do maybe minors, so maybe that’s a little bit more volatility. Then we will decide if their strategy is really attractive.
If they are trading some emerging market, we see it as emerging market risk, so that you have the more volatility, but if you’re trading on the US market or some other developed market, it should be, I mean, controlling your volatility below 5%, or at least a single digit for your volatility. So that’s for consistency.
And for three, we are looking at now more interesting fund managers. I believe we all have access to those big names or multi, multi-strat, or those platforms at the multi-billion size, either through banks or through just our investment approach. I think they are a good way to maintain because they just deliver what the market is doing and with the recent, fluctuation in that way is more on the macro side.
But for our, say next year outlook, for our allocation, we actually prefer more interesting fund managers or managers with more character. In that sense, you’re more differentiated from the others. For example, this year you see the multi-strat crowding and the increased multi-strat participation in global macro fixed income, RV and credit strategies.
These platforms were somewhat on the back burner in 2022 when those multi-strat funds were significantly outperforming. But, now you see medium performance just below risk free rates. I think there’s a very strong expectation from us, in further years, in 2024, it will bring further consolidation or closures among those multi-strat funds.
I think the advantage for those multi-strat funds is that they offer an uncorrelated return stream during but given those concerns we mentioned, as some of us, like, some of my friends are just like ourselves, we’re just doing more, you know, single strategy funds, that’s more obvious. (Funds) that look at some capacity-constrained asset classes, or some, some markets with a high level of asymmetry.
The example could be carbon, right, carbon credit or carbon allowance, or something with the climate or just this kind these topics. Sometimes we look at some funds, I mean, hedge funds are usually open ended, but we do see some closed-ended funds that you arbitrage, and also some insurance linked strategies.
So if the multi-strat fund still delivers uncorrelated returns, and also downside protection, I think that will be a very interesting way to see alpha generation. That’s our takeaway from those strategies.
Besides, we also look at the geography. Previously, we probably prefer and are very centralized in the US market, especially equity long and short. And as you know, last year, most of the managers are not ideal. This year is slightly better, but you see CTA and also macro, and in the past few years, they just beat to the top. It’s always volatile.
We want to see how the other markets react to the situation and if these equity, long-short or other strategies work in other markets. This year, I spend some time on the Indian market and also Japanese market, and this gave me a lot of surprise.
For the Indian market, you will see that there is the long and short is more long only, so previously we see long only actually. You know, for those long only funds, we still consider it as alpha generation. They have the more concentrated portfolios, or those big names in India have a long track record, actually. That’s also very appealing.
For the Japanese market, that’s another picture. If you see the performance this year, the US is still the best, ideal, and then followed by Japan, although the yen just depreciated quite a lot. But the market is actually very performing.
We look at some equity long and short and also market-neutral funds in the Japanese market. And it’s actually less crowded. Besides those big names in the Japanese market, we’ve been surprised that there are some managers trading on the small and mid-cap. They also get good returns. I think, to your point, how we allocate or how we evaluate the opportunities, there are several layers. But for us it really depends on the strategies and also their market and their position.
Jennifer Bruno 13:47
How do you identify the specific managers you will keep a close eye on? Do you use performance databases, or do you collaborate with others? Do you get ideas from other family offices, or how do you do that initial screening?
Cathy Dong 14:04
In the initial screening, we will take a look at all the strategies in this year. I mean, just those general types, but we say wait, we have a higher risk profile. We probably do not look at the RV or some single-digit (return).
The manager should deliver a double-digit return. That’s the first screen, the second thing that we will look at is if they are performing well or if they have a good track record along with their strategy. Then we will look at some macro.
So maybe for the fund managers, some of them adopted some fundamental strategy, but for us we would adopt a top-down analysis. We’ll look at that combined with their sub-strategies and also the macro environment and see if they’re still performing in the next few years.
We do have a three-to-five-year plan. We do not necessarily only look at their past performance, because the market is always dynamic. There are a lot of dynamics you have to combine in the future, so we have some estimation for the next three to five years.
And for three, we’ll look at some benchmark, some database to see if they are in that range, or if they’re performing or if they are, they’re just underperforming, and if it is the right time to still invest.
That’s for data. And then I think it’s really more on the personal level, on the fund manager level. We talk to the fund managers, and see if they are, if their position, if they can explain clearly what they are investing or why they are investing.
I think ‘why’ is more important than ‘what’, because if you generate 9%, for example, and then maybe you just dropped down to 20%, then you should explain why that happens. What happens in that way? Yeah, so if they can circle back to what their strategy is as a whole.
And then the most important thing now, is how they perform in a bear market. We use some sometimes companion, like last year, and if you’re just flat, you’re actually already good, but and if you’re positive like 20%, you are top performance. So how you behave like that is by accident? Or you do have your methodology and how do you achieve that? We compare to the success in the bull market. We actually more care about what’s your rationale in the bearish market? Yeah, so there are a lot of factors.
Jennifer Bruno 17:02
Right, right. And so, do hedge fund managers typically present to you, do they give you a presentation that covers all of these points? You obviously expect them to answer these types of questions.
Cathy Dong 17:21
Oh, yeah. We wouldn’t ask more the tactic side, because that’s more on the tech (due diligence), and I believe they are already very good at it. We care more about their rationale or their logic about their pickup.
For example, recently, we looked at a fund manager, they just follow supply chain, so they’re trading on the Japanese, Korean, and also Taiwan market, typically renewable energy and semiconductor, that’s something we are really focused on.
They just give an analysis like, how is the semiconductor in different markets performing and how in the future? And what’s the sign of the recovery for example in the smartphone and PC space? And also if they are still reporting a slight or modest quarter-on-quarter growth, or what would be performed? I think we’re just combined into the industries.
So yeah, not everyone is on that side, right, because some of them are just very technical. Then you just look at the numbers. But for us, yeah, we are more interested in those industrial phase or those sector-focused funds at the moment.
Jennifer Bruno 18:35
To what extent do you use performance databases? My understanding is that there are databases where managers enter their performance. And their profile, their strategy type, so that often investors and family offices will identify some managers by going into those. Do you use those particular databases to find funds in a specific strategy area?
Cathy Dong 19:05
Oh, currently, I feel it’s still very scattered lately. We use Bloomberg more, and I think most of us use Bloomberg. I mean, it’s very easy and open to use. I guess you’ve got other software that just consolidates all the information. That could be better, but maybe I didn’t find it. But perhaps there are.
Jennifer Bruno 19:30
So Bloomberg primarily?
Cathy Dong 19:32
Jennifer Bruno 19:34
And I noticed that you attend a lot of events. Are events useful for you to well, family office events specifically, is that useful for understanding your peers and what they are looking into? Does that help with your idea and research generation?
Cathy Dong 19:55
Yes, I think so. But, if you say understanding the family office or asset allocator, their appetite, (optimal events) shouldn’t include the large conference because it’s hard to just talk to people and (you can’t) hear. So, personally, I prefer a roundtable discussion. And everybody there brings something to the table, and there is always a theme, some thematic talking or discussion. I think that really helps.
Jennifer Bruno 20:28
For managers who are trying to understand family offices, who might be open to taking a look at them. I understand that some family offices may be open to emerging managers, while some are not. And what would you say is a good way to reach out? What would you be open to in terms of communication?
Do people, meaning asset managers, do they ever reach out to you on LinkedIn? Or do they email you? Or do you prefer referrals from other managers? For those that you that are not on your radar? In your typical research? How would somebody get on your radar?
Cathy Dong 21:13
I think there are two ways. On our own side, we’ll do some research on marketing. We will reach out to some managers on our side, we will do that, but more or less they are referred by somebody else, like cap intro. That’s a good way.
And also some peers, either friends or somebody else, just like a referral. Some of them also approach us on LinkedIn. I think LinkedIn is a good way. But you have to specify what makes you different. I think many fund managers, they just reach out to us, and they just give a lot of data and whatever, but it’s not really important, when you reach to us, right?
I mean, you just specify some core data, and that should be okay. It’s more like, why are you here? Or why do you think you are different? I think your position is very important. So generally, for the fund managers, for us, we’re very open to talk to anyone, the managers, but not everyone.
It’s better to just ask the family office first. I mean, you just do some mutual introduction and feel a bit more warm.
You just ask them, what’s your risk profile? And how do you consider a hedge fund allocation? Or what’s your return expectation? And also essential, essential, geography preference. I think you’d better ask them first. Some of them, they do have a clear idea, but some of them they do not.
If they do not have a clear idea, maybe you can tell them, you can make some suggestions. You can talk to them and (explain) what your strategy is and why it’s appealing. I think it’s more like the interaction. Just avoid a hard sell.
Jennifer Bruno 23:27
Yes, yes. As far as point of differentiation, this is something that I stress to asset managers and say, you’ve got to be differentiated, you can’t be just a me-too strategy. They sort of sometimes look at me puzzled, like, you know, I’m not sure I know, what my point of differentiation is. It’s really important to identify that and some clearly do, obviously, and that really helps.
What would you say are common mistakes that you would say what not to do? What would turn you off, in terms of your communication with an asset manager? What are (communication) mistakes that you have seen?
Cathy Dong 24:11
I think it’s about their approach. Some managers are understanding. Some hedge funds are very, I mean, quantitative. Some of them are just very rational, or very, you know, when they approach you, it kind of feels arrogant in that way. I know they are not, but (that) way they approach is kind of something to avoid.
Just try to be nice, more patient because not everyone is as professional as you, right? I mean, so that’s the reason why we invest you. Just try to be more patient and nice.
I think it’s about simplifying your strategy. Some managers use very complex terminology, or some calculation or methodology, and a lot of very complex things to explain, but people do not really understand. They do not feel you are sophisticated because they didn’t get you.
It’s just better to simplify your strategies in three or five sentences and just summarize what your strategy is. I think that would be better.
And also, I think it’s better not to do a hard sell. (It’s not advisable) to sell your fund to everybody without asking them first. Then you do not know who’s your right audience. You probably missed an opportunity, because people think, ‘oh, you do not really know what I need and you presented something I’m not interested in’, so they may be turned off.
Jennifer Bruno 26:11
Yes, that’s really important. I often advise to make sure you understand, you know, that a family that you’re providing a solution to somebody. You solve, don’t sell.
Make sure that you are a useful piece in the family office’s portfolio, that they need you and then focus on differentiation and be clear. Articulate clearly. I say that over and over again.
Don’t be overly complex and to speak in a language that simplifies what you do, because not everybody necessarily is an expert in a given space or area and jargon can really turn people off.
Cathy Dong 26:57
Jennifer Bruno 26:57
What are you paying attention to going into next year? And that could be like on a macro level, geopolitical. What are some trends that interest you going into the new year?
Cathy Dong 27:13
I think for next year, our key markets are still the US, India and Japan. China depends. The Chinese economy probably is already at the bottom. Maybe it’s the time to really catch and see if there’s opportunity. I think we’re still evaluating at that point.
Then the US and India and Japan market, these are three totally different markets. For the US market, I think everything is very transparent. And you just have the track record. I think we are looking for some smaller or niche fund managers.
They can come from the big houses, and they’re doing their first-time fund. We’re very open to that. Combined with some terms, like AI, or machine learning or some topics like these, or defense even. Some angles, not just Amazon, not just Google. More specific industries.
In India, we’ll look at some long only as well, mostly focusing on the B2B sector. In Japan, we’re looking at some small to mid cap and see how it goes. That’s on the geographical thinking.
In terms of industry, I think, renewable energy, and AI, AI cybersecurity, also semiconductor are some things we really care about. I mean, whatever is public market and private market, actually, they can combine. We’re looking at some, I will say sector-focused fund managers in that way.
Jennifer Bruno 29:06
You did mention renewable energy. Do you focus on SEG or impact at all? Is that any part of your allocation or just not so broadly, but more specifically, renewable energy?
Cathy Dong 29:28
I wouldn’t say we are looking at the impact on the public side because I think making money is something we’re really clear on the public market side. I guess they’re probably providing some solution. It can be some clean tech that’s helping you transform the solar into electricity or whatever. And also they do some carbon, carbon credit in that way. I would say something related to energy, not really specified, but in the private market. We do look at clean tech mostly.
Jennifer Bruno 30:10
And why the focus on Japan and India specifically, what about those markets is appealing?
Cathy Dong 30:19
As per our current strategy, the US is still the largest allocation. And then because in Europe, we do not have people there, I do not have to comment on that. For Asia, if you look at the Asian market in China. Most people trade on the Chinese market, and now as you know, because of the geopolitics, and also the inner economy in China, we’re just going to wait and see what is going on.
The Indian market, that’s a similar size to the Chinese market. But of course, their public market is less, less advanced than China or the other parts.
The Indian public market actually delivers higher multiples than the US market in terms of B2B, especially, and also some fintech, financial services. And if you look at those companies, they have very high margins. From the private market, we look at the Indian market, then we come to the public market, because we have to consider how they exit.
When we look at the public market we were surprised they actually performed better than the US market. Besides the Indian market, besides China, you have mostly developed Asian markets, and also Southeast Asia. But Southeast Asia is very small and is less advanced. And yes, I think we still have a long time to see if there’s any trading opportunity.
For the developed Asian market, Japan I think this year. Previously Japan was considered a very developed market. Since this year, I think a lot of the sectors are competing. Japan is good for the semiconductor and also deep tech. I think that’s still considered a good market.
If we look at Korea that should be more automotive, electronics, or smartphone. The multinational companies all major in that, and they also do global business. It’s a possibility and they will further grow. So probably we will look at the Korean market next year.
I think the Australian and New Zealand markets are still more for natural resources. We still need to learn more.
Jennifer Bruno 33:10
That’s super helpful. For the cutting-edge markets, like clean tech and so forth, do you rely on VC managers? Do you lean on VC fund managers? Or do you do direct investments? Or is there a percentage of both?
Cathy Dong 33:29
For our private market, that’s very clear. For the VC, unless we know that person, but generally not. We invest in VC funds, mostly. And in the US, the topics are very obvious. Just AI, machine learning, aerospace, cybersecurity, B2B, semiconductor and biotech. Those are the topics we invest in the US.
And in India we look at some B2B. I think on the clean tech side, South East Asia actually has more opportunity here. But it’s just not limited to this. I’ll just say it’s the current focus for us, but clean tech can be everywhere.
There are also good opportunities in Europe as well because I think Europe is leading the role in climate change and clean tech. That’s on the VC side, we’re mostly investing in funds.
Through funds, we get access to direct deals, but we do not invest in VC directly. We can access their portfolios at the early stage, so we get a better understanding of the companies and the founder and we can get some, you know, some time and see how they grow.
Probably after another two rounds, we will invest in them directly. We’re probably not the lead investor, probably a minor investor or silent partner. But hopefully we can bring some value to the companies. That’s on the tech side.
From the traditional business side, the cash cows, we control the investment for sure. But that’s more on the buyout side or the PE side.
Jennifer Bruno 35:17
What is the typical duration that you would evaluate a manager or a particular investment before you make an allocation?
Cathy Dong 35:29
It depends. If they are an established name or already have a long track record, it’s very quick, about three months, something like that. But if they’re a fresh manager, I don’t know, maybe if a first time manager maybe six months or more.
We need time to evaluate them to track them and see how they react. That’s for hedge funds but for VC, I think it takes longer. It’s like, six months to a year to evaluate. Because as you know, we need to see how the assets if they are able to do trade sale. Exit is a big issue now.
Maybe in the US, that’s obvious, because the US market is still quite liquid. And there are a lot of opportunities to exit. You can sell to a PE fund, do some trade sale, you can do M&A. There are a lot of the multinational companies. Also you can do an IPO but IPO market is not very common at this moment. I believe they will recover next year.
In the US market, there’s not that much exit issue, but it’s really happening in Asia. I think, when we monitor them, it’s more because we want to see how they how they perform, how they execute, how they do some operations.
Jennifer Bruno 36:52
Well, this is so helpful. Thank you so much for your insights. This will help fund managers and other capital seekers really understand what it takes to get an allocation. Thank you so much for joining me today. And explaining these areas of how you allocate, how you go about the process of finding investments and again, thank you so much. I really appreciate your insights.
Cathy Dong 37:25
Thanks, Jennifer. Yeah, it’s always a pleasure and also happy to learn from the other allocators and also maybe other fund managers. Yeah, just to educate myself and also our team.
Jennifer Bruno 37:37
Well, thank you, Cathy. And I look forward to chatting with you again in the future.
Cathy Dong 37:43
Yeah, thank you so much.