Hugh Hendry’s China short hedge fund, which seeks to profit from a Chinese slowdown by shorting the credit of companies with exposure to the mainland has proved to be one
Hugh Hendry’s China short hedge fund, which seeks to profit from a Chinese slowdown by shorting the credit of companies with exposure to the mainland has proved to be one of the hedge fund industry’s most successful trades in 2011 reported the Financial Times this week. London-based Hendry is well known for his bearish views on the world economy and it seems his strategy of buying CDS on highly cyclical Japanese corporate credits that have high exposure to China has paid off. By indirectly shorting China through these CDS his fund has generated impressive returns of 52 per cent year to date according to investors. Hendry’s flagship Eclectica Fund, which also has some exposure to Japanese CDS, has likewise done well, gaining 12.2 per cent year to date. By comparison, the average hedge fund, globally, has returned -4.45 per cent according to Chicago-based Hedge Fund Research.
It takes a brave investment manager to hold a contrarian view on China, whose economy is expected to have grown 9.1 per cent in 2011 – although the OECD predicts a slight contraction to 8.5 per cent for 2012. Few managers have found successful ways to bet against China, the other notable exception to Hendry being Jim Chanos whose fund takes a bearish stance on the country’s property market. Last month, China’s inflation fell to its lowest level this year, 4.2 per cent, having spiked at 5.5 per cent in October. Whilst China might have started loosening monetary policy and injecting liquidity, some fear that continuing problems in the eurozone will hit Chinese exports and deliver a hard landing to the world’s second largest economy in 2012.
