China's hedge fund industry blooms as stocks boom
Commercial and residential buildings stand in the Luohu district of Shenzhen, China, on Wednesday, Dec. 18, 2013. New home prices in China•s four major cities rose, with the southern business hub of Shenzhen posting the biggest gain in almost three years, as property measures by local governments failed to deter buyers. Photographer: Brent Lewin/Bloomberg©Bloomberg
More than 4,000 new Chinese hedge and private equity funds have launched in the last three months, fuelling a mass exodus from traditional investment houses, as ambitious fund managers seek to profit from the country's booming stock market.
The number of private investment funds — including securities, private equity, and venture capital — totalled 12,285 by the end of May, up from 7,989 three months earlier, figures from China's securities regulator show. Assets under management increased by $75bn to $433bn.
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The Shanghai Composite Index closed at a seven-year high on Friday and is up 150 per cent over the past year. The small-cap, tech-focused ChiNext board in Shenzhen has more than tripled in the last year.
Feng Gang, chairman of WinSure Capital, says the government is encouraging entrepreneurship in finance. He launched his fund in January after 14 years at Chinese mutual fund companies, most recently China International Fund Management, a joint venture with JPMorgan Chase.
"In the past 14 years I've never seen regulators so encouraging of innovation. In the investment industry, we're taking the lead."
Last February the government switched to a streamlined registration procedure for PE and hedge funds, abandoning the more onerous approval process.
Employees at hedge and PE funds have risen by over 60,000 in three months, topping 199,000 by end-May.
"More than half of our research team has left over the last year to join hedge funds," said a vice-president for institutional business at a large Chinese securities brokerage in Shanghai.
"It's the same with our [mutual fund] clients. Now all the fund managers are 'post-80s'," she said, referring to those born after 1980.
Chinese hedge funds differ from western counterparts in key respects. Where western funds mainly rely on institutional investors, Chinese hedge funds draw from retail investors, using banks and brokerages as sales channels.
A typical Chinese hedge fund has a minimum investment of only $161,000 and a lock-up period of 12 months, while western hedge funds typically require an investment of at least $1m and longer lock-up periods.
Chinese hedge funds are also small on average. Of the 12,285 registered funds, only 56 manage more than Rmb10bn ($1.6bn) in assets.
Most Chinese hedge funds follow long-only strategies, as short-selling is possible in China only for large-cap shares. Even that it is difficult due to limitations on securities lending.
In addition, an absence of available derivatives products hinders fund managers' ability to use hedging strategies common in developed markets.
Higher pay is the biggest factor luring asset managers away from brokerages and fund houses and into hedge funds.
Chinese funds use a pay structure similar to that of western funds, taking a 20 per cent cut of profits. Some more established fund managers also take a fee worth 1-2 per cent of assets under management, as in the west.
Despite the proliferation of new funds, industry observers say many are now struggling with a wave of redemptions as investors seek to lock in profits after a year of strong gains.
Asset returns, rather than net inflows, likely account for the bulk of the $75bn increase in assets under management since March.
Analysts suspect re-allocation of savings from a now richly valued stock market back to the property market helps explain why housing sales have rebounded and prices have stabilised following months of decline.