Eric Wong: Liquidity, leadership and legacy

Inspired by a multi-generational trading legacy, a desire to carve out new opportunities and to prove that superior risk-adjusted returns that are also liquid and uncorrelated to major asset classes can be found, Eric Wong established TCG, an asset management and specialty advisory firm, on behalf of his family in 2003. 

Over the years, his focus shifted to TCG’s Celera division which was spun out in 2012 to consolidate its regulatory, technology, and business infrastructure. The aim evolved from seeking external investments to reinventing his family’s earlier trading businesses and others he got involved in and to also assist others in turning trading opportunities into viable businesses.

The third-generation business leader saw how major political and economic upheaval over the century-plus history of his family’s business endeavours forced them to pivot and diversify. Eric’s family firm has a background in the chemicals and electronics industries dating back to 1918 in Shanghai, 1950 in Hong Kong and 1970 in Taipei.

Here, Eric talks about his family’s and his own experience over the years with both success and failure in good and hard times and his reasons for concentrating on liquid trading opportunities in multiple industries despite a broad move towards illiquid assets and strategies over the recent past.

How did TCG and Celera come to be?

By the 1990s, the family had sold off most of the industrial joint ventures, had some legacy real estate and had made some investments into venture capital (VC) /private equity (PE) in the hopes of those investments diversifying the family’s exposure and bringing new business opportunities. The 1997 Asian Financial Crisis and the bursting in 2000 of the Tech Bubble pretty much flushed those VC/PE investments down the toilet, along with the stock market and the remaining industrial and real estate assets also getting hurt. So not only did the strategic benefits promised by the VC/PE managers not occur, as they usually never do, they also lost money at the same time as all the other assets.

This experience pointed to a clear need for liquid, uncorrelated strategies and, with the hubris of youth, I thought I could find superior risk adjusted returns and so that started my ongoing quixotic quest of tilting at those three windmills. I also figured that if we needed this return profile then others should also need it.

From 2003, with the establishment of TCG, I spent the next ten years building my own quantitative strategies and looking at emerging quant managers. After a disastrous initial foray into short volatility strategies which actually had even worse characteristics than traditional assets in a market shock, I focused on strategies with long volatility characteristics. I was hopeful that I was on the right path when the simple medium-term trend following strategies I designed did well in the 2008 Global Financial Crisis. However, in subsequent years with government intervention which broke the downward trend, the trend-following strategies gave back some of the gains. Clearly, medium-trend following alone was not the silver bullet and more likely it would take a panoply of strategies to attack the problem, so we looked at emerging quant managers for inspiration. We also shifted to managed accounts to get the transparency to the strategy and risk and for safe custody of funds.

We noticed that shorter-term strategies could weather different market environments better but carried more trading costs due to shorter holding periods, resulting in more volumes traded. We also noticed that net long volatility options strategies could capture the long volatility return characteristics but the ongoing bleed from options’ theta decay was a considerable cost.

Initially, as a cost reduction measure, we looked to add an equities high frequency trading (HFT) team on the expectation that since they did not require a lot of capital and as long as they did not lose a lot of money their huge trading volumes would drive down our brokerage costs considerably across our managed accounts. It turned out they were considerably more profitable than the other strategies, and so we closed the other accounts and spun out Celera in 2013 as a principal trading firm to house the HFT and also options market making strategies. Celera became my main focus and later also came to enter other markets including digital and physical markets.

“Diversification without decorrelation is almost meaningless”

Many families have exposure to legacy illiquid assets or businesses, what would be the benefit of liquid and uncorrelated strategies to them?

To be fair, it's likely that these very legacy illiquid assets or businesses created much of the family wealth and there is also a downside to staying too liquid. This is the story of why there are almost no Shanghainese real estate tycoons in Hong Kong. Many of them, like my family, fled China where all their property was confiscated so while they were ready to rebuild their industrial businesses, mainly in textiles, they were not prepared to invest heavily in local real estate for fear of needing to flee again and face another loss to expropriation.

Most families already value the mobility of liquid assets and have them housed outside the main jurisdiction where they have their main illiquid assets/businesses. This can certainly be useful if the main jurisdiction is unstable, which in the inflationary cycle we are entering can be many places previously thought to be stable. The problem with liquid assets is that, in their traditional form of stocks and bonds, they tend to have mediocre returns and more importantly are highly correlated to the broader economic environment. At the same time, hedge funds which aim for outperformance end up being fee vehicles for their managers and also often underperform stocks and bonds while still being highly correlated to them.

Diversification without decorrelation is almost meaningless and there is a paradox that two negative return strategies, if they are perfectly negatively correlated if run together with regular rebalancing, can produce a positive return strategy. That is the power of decorrelation. Even for diehard illiquid asset investors, having a liquid uncorrelated strategy opens the possibility that in a down market your performing liquid strategy can provide ammunition to reinvest into more illiquid assets while they are beaten down.

As an advisor to ultra-high-net-worth families, and coming from a multi-generational family business yourself, how do you get generations who may only understand a particular type of investment approach on the same page?

I’m not sure there is a template and I’m not sure it’s really possible. They became successful with their strategy, whereas I am still working on my craft so who am I to lecture them? I would just suggest the next generation be allowed to experiment in new areas and that everyone encourages and embraces the learning from failure as to often the Next Gen is fearful of experimentation and failure even though the previous generations’ success must have come with a lot of failure.

Perhaps even more important than liquid or illiquid assets or strategies is a concerted effort to define and redefine and learn and master any business/strategy. I have seen well-run businesses do well or take advantage of both good and hard times. Usually that resonates with all generations. Given that the greater the scale of the achievement of the first generation the less likely it will be that the Next Gen can replicate or exceed it, then it is important that they still become their own men and women defined by what they and not their family achieve, and not be trapped by the family’s legacy which often comes with its share of headaches.

Another point the first/second generattions appreciate is the need for the Next Gen to build their own teams and advisors. There’s a Chinese saying that ‘one generation of emperor has one generation of ministers.’ Much is made of the family members but the muscle and sinew of the organisation is the non-family team. The loyal team members of one generation may balk at working with a new generation with very different ideas.

“Losses are privatised and gains are socialised under a true leader.”

Your own family business dates back to 1918. How was it established and how did it evolve?

My family lineage is originally from Shanxi, as is actually true of all people with my last name Wang (changed to its Cantonese spelling Wong by my grandfather when he came to Hong Kong). Shanxi was a frontier province, not particularly fertile for agriculture and so became mainly a trading centre with the nomadic tribes like the Mongols during the Ming and Qing dynasties. With trade flourishing due to the mutual need for horses, weapons, silks and other wares, there were several cities that became financial centres akin to Wall Street.

These cities issued the equivalent of bank-accepted bills so traders would not need to carry heavy and dangerous-to-transport precious metals on their travels. The facilitation and trading of these bills generated an annual return of 30-40%! Shanxi is also famous for making vinegar, as it did not have a strong agricultural base it focused on value-added processing of higher-value produce. I wonder if that is the origin of our affiliation with chemistry!

Latterly, my family migrated from Shanxi to Nanjing and then finally to Shanghai. By that time, my grandfather, who studied chemistry and learned English at a military academy and had been in the army briefly, was looking to go off on his own and believed the future lay with the West. As a result, he befriended some American partners and together they set up a chemicals business in Shanghai. So right from the start, it was a Sino-foreign joint venture. They started importing indigo dyes from the US, back then the supplier was called National Aniline, which then became National Chemical, then Allied Chemical and Allied Signal before it became Honeywell… and we still distribute their products today.

My grandfather wanted to place his sons in every step of the textiles supply chain from dyes to weaving to garments. He wanted his sons to be his generals in business but he got scholars instead. Nevertheless, with all the textiles businesses in Shanghai, times were good for dye suppliers and people lined up around my grandfather’s house to buy the dyes and before the vessel carrying the dyes arrived it would be sold out. My grandfather had nine children, my father, who is now 95, was the youngest.

After my father studied in America, he joined the family chemicals business which had now moved to Hong Kong following the rise of communism in China and had languished as the industry had evolved. Things were so bad that shareholders were looking to give back their shares just to get out.

It was under these circumstances that my father started looking at the electronics industry as he had a relationship with what was then Motorola. He basically went off on his own, outside of the original chemicals business, got a loan from Bank of America and partnered with Motorola. Fortunately, the electronics industry just took off throughout Asia, and again it was good times. Most remarkably, though he got and guaranteed the loan to start the business, he gave the shares to the chemicals company so that all of its shareholders now also became shareholders of the electronics company.

It's a testament to his character that he believes a leader takes the heaviest losses and then has to share the gains. In other words, losses are privatised and gains are socialised under a true leader. It is the opposite of how many leaders, executives, fund managers behave and a point of pride with our family. As a result, I’m also sceptical of professional service providers because, simply put, they often have no skin in the game let alone any of the qualities of a real leader.

You’ve had a very impressive education - including an M.S. in Biotechnology from the Kellogg Center for Biotechnology and a B.A. in Molecular Biology from Pomona College - before joining your family’s chemicals and electronics companies in Greater China. Was it always your intention to go all in with the family business?

Not really! The family business had gone back into China as soon as it opened up, as seen by the very few digits in the company number of the Shanghai subsidiary, and did not need me to spearhead such an effort. I think going back to the family business was partially because I got done with grad school right around September 11, 2001, and my father was saying, ‘You’re a foreigner, you’re probably not going to be able to find a job during such a tense period in the US’. This was also when the tech bubble was blowing up and it didn’t seem like a great time to find my way in the US.

So I came back and, for the first few years, I worked for the family business. But then I was given free rein to look at any new opportunities. So I spent most of my time in China with a western mindset of how business should be done and this proved totally fruitless. My conclusion was that I had no competitive edge in China and only if I can service Chinese businesses outside China would I have any advantage. At the same time, my experimentation with quant strategies pulled me slowly away from the family business which was struggling in a more porous Chinese market where suppliers could easily find multiple distributors all willing to cut their own throats and reduce their margin.

“The real money is made by building businesses that outlive the trading opportunity and continue to grow on its own.”

Clearly, there’s an inherent business sense passed down by your father and grandfather. Did what you learn from them help you in making your own mark?

It’s important to note that, in the case of both my grandfather and my father, their businesses weren’t turned into enduring growing enterprises, rather they were trading opportunities that they hit upon and did as best they could. Where we fell apart was always building the organisation and pushing it to another level. We might be good traders and can sniff out a decent opportunity, but that’s not how the real money is made. The real money is made by building businesses that outlive the trading opportunity and continue to grow on their own. You have to keep reinvesting and growing, as opposed to going in for just the trade, which is what happened for the first two generations of our family business. I hope I’m the generation that breaks that cycle and builds lasting businesses.

My grandfather’s chemicals business rose, plateaued and then declined. My father saw the electronics business rise and then decline. I tried my hand at the financial stuff in my way and saw those efforts rise and decline. Now I’m hoping to iterate all three businesses differently to both burnish the three-generation family escutcheon and infuse a new mission of turning traders and trades into businesses.

Now, when I look for potential investments, I am looking for working capital driven businesses in any sector (though I am biased towards the industries I know) that have the following three criteria:

- A majority of the balance sheet being current assets/working capital
- Cash cycles on the working capital of not more than 1-2 months
- Double digit net margins on the working capital per cash cycle

This is part of the process of defining with high specificity on all aspects of what business you want to be involved in.

Campden Wealth’s Global Family Office Report 2022 found that, in the wake of the Covid-19 pandemic and facing soaring inflation, increasing interest rates, collapsing stock markets and imminent recessions, many family offices are proactively adopting inflation-mitigating investment strategies. To your mind, is this strategy likely to remain common practice for the medium to long term?

I think we’re just in the beginning of a multi-year inflationary period, which usually is turbulent and volatile but also offers sources of opportunity. I think in this environment, liquidity and decorrelation take on a more important role and the psychologically comforting fig leaf of illiquid assets not being mark to market will be torn off as they fall apart entirely and abruptly.

I think that with a more volatile environment, real estate and private investments will be all over the place. The long-term 60/40 equities-versus-fixed-income approach, for example, has proven not to do well during inflationary periods because the benefit of that strategy goes back to correlation. Generally, when stocks drop, the Fed lowers rates and fixed income goes up. In an inflationary environment which requires looking back to the 60s and 70s stocks and bonds’ negative correlation breaks down and both can go down together.