Our Hedging PhilosophyAugust 2018 In view of market uncertainties and volatilities amid US-China trade war and Turkey Lira crisis, investors are rightly concerned with the rising risk of equity markets. In this update, we would like to address these concerns by sharing our hedging philosophy for downside protection. Philosophy Our portfolio hedging is consistent with our value investing approach – seek margin of safety and protect capital. Bottom-up value analysis of individual securities is the most important part of our work, but it alone is not enough given the nature of highly volatile emerging markets like China. Over the years, we have developed our proprietary hedging strategy, which reduces portfolio downside volatility and increases risk-adjusted returns. Lowered net exposure due to hedging reduces the need of selling down portfolio holdings, hence reduces market impact and let us focus on the long term when analyzing individual securities, in other words, it makes us a better long-term value investor. Our portfolio hedging is not based on market timing (in our option, market timing does not contribute to longer term returns). As a value investor, we would hedge more at higher market levels and gradually reduce the hedging when market comes down. Hedging is based on our experience, imperfect but reasonable judgement and assumptions, it has produced better risk-adjusted returns over the years. Let us explain how it works in details. A portfolio hedging level is determined by our proprietary portfolio hedging model, which consists of three perspectives, namely Market Valuation factor, Macro Economic factor and Scenario Analysis. For Market Valuation factor, the input parameters included, but not limited to, market valuations like P/E, P/B. For Macro Economic factor, we would analyze economic data changes such as PMI and M2. In Scenario Analysis, we would use historical scenario, virtual scenario and mixed scenario to test asset value changes. Example How to think about current US-China trade war tensions? China market is still cheap based on our Market Valuation factor and macroeconomy has seen limited negative impact from the trade war, but our Scenario Analysis (when analyzing the US-China trade war by drawing parallel to previous events in similar nature) concludes that 2/3 hedging factor would be the most appropriate for the portfolio. In other words, without selling down individual securities, the Fund needs to hedge 2/3 of market beta. Performance In conclusion, we aim to add value to our Fund investors through active hedging/ asset allocation with the help from our quantitative models. As a value investor, we believe in our outstanding ability for bottom-up stock pickings, combined with dynamic hedging tools, the Fund’s volatility could be reduced. This is better demonstrated in difficult market condition like 2008 and 2018. More remarkably, the Fund achieved the good performance without adding volatility.