Pharo Management is adding the yuan share class to its flagship $3.3 billion hedge fund, convinced the Chinese currency will gain 5-7 percent against the dollar in 2011.
Guillaume Fonkenell, who founded the emerging market-focussed hedge fund a decade ago, cited the "enormous pressure" on the Chinese authorities to let the currency appreciate further as the reason for his conviction for the larger-than-expected rise.
"All of the sound bites from the Chinese authorities over the past few months suggest that they have decided to allow a further rise in the renminbi this year," Fonkenell said. "While the numbers we hear in the market are in the 3-5 percent range, at Pharo we believe that they will be a bit bolder."
The yuan is also known as the renminbi. Fund share classes are variations of a fund in different currencies. Pharo's yuan share class, the first from a hedge fund tapping the nascent offshore yuan market in Hong Kong, has a capacity to take in about $500 million and will sit with the firm's existing funds denominated in currencies such as the dollar and the euro.
Fonkenell said recent liberalisation of rules governing the offshore renminbi market and increasing liquidity, mainly in Hong Kong, allowed Pharo to structure the share class to gain from what he believed would be an appreciating currency. The yuan rose 3.6 percent against the dollar in 2010 and a Reuters poll expects it to gain about 5 percent this year.
Fonkenell, whose flagship fund has never given a negative annual return, said there were also "solid economic reasons" for China to let the currency appreciate.