This Hedge Fund's Venture Capital Push Reaped 27-Fold Gains

(Bloomberg) -- ChinaRock Capital Management has rewarded investors in its five-year-old venture capital fund with 27 times their initial outlays by scoring huge returns from financing start-ups involved in everything from artificial intelligence to ride sharing.

The $37.5 million CRCM Opportunity fund has distributed more than $1 billion since it was set up in 2013, Toby Zhang, a venture capital partner of ChinaRock, said by telephone from San Francisco. An earlier venture capital fund returned more than $300 million.

Years of central bank easing has crimped the volatility that helped drive hedge fund returns and contributed to years of underperformance that prompted many hedge funds to seek alternative strategies. ChinaRock has been ahead of the curve, opening its first venture capital fund in 2005 with investmetns in fledgling companies that scored large returns when they eventually got sold or went public.

“We are looking for opportunities where today in the market it's very nascent, but in the next three to five years, we think, will drive the next wave of innovations in technology,” Zhang said.

ChinaRock founder Ding Chun, who once managed money for Farallon Capital Management, set up the Genisis Fund in 2005, initially raising $32 million to invest in early-stage Internet and technology companies. ChinaRock now has $158 million in four funds that focus on young tech companies in the U.S. and China, Zhang said. ChinaRock also manages a traditional hedge fund.

ChinaRock's strategy is to get in on the ground floor and then cash in big when companies are eventually sold or launch hotly contested public offerings. When ChinaRock's second venture capital fund invested in video-sharing application Musical.ly, the Shanghai-based startup had a staff of two. It went on to top the most popular application charts for both Android and OS, and was downloaded by hundreds of millions of teenagers across the globe. Musical.ly was bought by Chinese media company Toutiao for nearly $1 billion last year, Zhang said.

Among the second fund's other profitable investments are shuttle bus company Chariot, now part of Ford Motor Co. and Orbeus Inc., the San Francisco-based artificial intelligence and image recognition company acquired by Amazon.com Inc. The CRCM Opportunity fund also participated in late 2014 in a round of private financing for Ripple Labs Inc., the company behind the cryptocurrency. It still holds that stake.

Some of Ding's bets have helped produce new ChinaRock investors. Ding's first fund backed a one-person video-streaming startup called Youku. The company was bought by e-commerce giant Alibaba Group Holding Ltd. in 2015, in a deal that valued Youku at $4.8 billion. Youku is now an investor in ChinaRock's fourth venture capital fund that finished raising $56 million in the first quarter, said Zhang.

The two newest funds have yet to return cash to investors. One focuses on enterprise information technology, consumer, health care and bio- and financial technology, while the newest fund, Frontier Technology, will dabble in artificial intelligence, augmented and virtual reality, robotics, drones, self-driving vehicles and blockchain, Zhang said.

That fund invested in Cargo, which provides vending machines to ride-sharing companies, allowing drivers to sell consumer items such as mobile phone chargers and snacks to riders. New York-based Cargo also boasts the backing of consumer goods giant Kellogg Co. Frontier Technology also provided financing to the Drone Racing League, which runs competitions in which racers use virtual reality glasses to pilot drones.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net.

To contact the editors responsible for this story: Sree Vidya Bhaktavatsalam at sbhaktavatsa@bloomberg.net, Andrew Davis, John McCluskey

©2018 Bloomberg L.P.