More foreign hedge funds are devoting resources to China, attracted by strong returns, the potential for growth and signs that the country will continue to develop its financial markets.
As reported by the Wall Street Journal, China-focused hedge funds managed USD12.9 billion in assets as of the end of September, exceeding levels before the global financial crisis, according to Eurekahedge, which tracks the industry. In the nine months ended Sept. 30, average returns from China-focused hedge funds eclipsed those in neighboring countries, with the exception of Japan.
Last month, China announced a basic plan for a newly established free-trade zone in Shanghai, where it plans to conduct trials that would give foreign companies greater freedom in the country’s tightly regulated financial markets.
Regulators are expected to promote the development of a futures market for oil and allow securities and futures companies in the zone to engage in over-the-counter trading in commodities and financial derivatives in the domestic market. Separately, Hongkou, a district north of Shanghai’s glitzy financial hub, is planning to offer tax and rent incentives to attract hedge funds.
For now, foreign hedge funds aiming to invest in China’s domestically traded assets are taking baby steps. Foreign hedge funds can’t operate investment vehicles on the mainland but have been able to raise money locally by cooperating with fund-management companies. Last year, Winton Capital Management, the largest managed-futures firm in Europe, teamed up with Chinese asset manager Fortune SG
Fund Management to tap China’s futures market.
Faced with limited investment options in China, most hedge fund managers are investing in Chinese assets traded outside the mainland. Of the 170 China-focused hedge funds tracked by Eurekahedge, roughly 110 invest in Chinese stocks trading on international markets, including in Hong Kong and the US.
Italian luxury leather goods brand Bruno Magli said on Tuesday its hedge fund owner Fortelus has begun exclusive talks to sell the entire company to a consortium of Asian investors.
As reported by Reuters, Bruno Magli said London-based Fortelus is expected to close the deal with a group of investors including South Korean retailer E-Land and Hong Kong-based private equity firm CDIB Capital in November.
E-Land has been acquiring outlets, leisure holdings and fashion brands since 2009, and already owns upmarket Italian bag and wallet maker Mandarina Duck.
CDIB Capital is owned by Taiwan-based investment and merchant banking group China Development Financial.
HFR reports that capital invested in Asian hedge funds surged to its highest level in five years and passed an important growth milestone in the third quarter, according to their latest HFR Asian Hedge Fund Industry Report.
Total capital invested in the Asian hedge fund industry increased to USD103.8 billion (¥ 10.14 trillion Japanese Yen, RMB 654 billion) surpassing the USD100 billion milestone for the first time since 2Q08, prior to the global Financial Crisis. Performance gains were led by the HFRX Japan Index, which extended record performance gains in 3Q13, while hedge funds in Emerging Asia continued to outperform local equity markets. Global hedge fund capital increased by USD94 billion to a record of USD2.51 trillion (¥ 244 trillion Japanese Yen; RMB 15.7 trillion) in 3Q13.
Asian hedge fund specialists GFIA estimate that there are now 760 funds dedicated to Asian markets. In its latest report, the firm comments: "Out of the reporting managers, 481 are run out Asia. As the competition for scarce asset intensifies, a significant number of previously "under-the-radar" managers have registered themselves on hedge fund databases to raise public exposure." However, they also note that a noticeable number of very small funds have ceased to update their profiles on databases. "We suspect this is either due to poor performance, or the time lag between liquidation and being eventually classified as such on databases. These managers are not necessarily leaving the industry, but are consolidating with larger managers, or closing the fund management entities to focus on managing proprietary capital. We are also aware that a number of the very large funds increasingly prefer not to report to databases; the transparency of the Asian hedge fund industry continues to decrease. Funds which are closed to new money also do not have any incentive to report."
GFIA reports for the first half of 2013, they saw six new launches and 10 closures. "The new launches were mostly small start-ups focusing on long short equities. In terms of closures, we saw relative value strategies retreat the most relative to the size of their strategy buckets, although long-short funds saw the most exits in absolute numbers."
The firm comments that 2013 continues to be a difficult year for fundraising for startups as investors have gravitated decisively towards bigger and established funds.
"This year, we noticed a marginal increase in the number of firms with AUM between USD200m to USD499m as well as USD50m to USD99m. This coincides with our observations that "mid-sized" Asian funds, especially Japan and China focused ones, are now at last seeing marginal inflows since the start of 2013."
GFIA says that of the 618 funds that report AUM regularly, 297 of them have less than USD50m under management. "The absolute minimum level which we estimate management fees can support the operational expenses of a typical boutique in Asia before salaries - although this figure has likely increased over the past few years. USD100m continues to be the minimum hurdle which, in our experience, must be met before majority of investors are comfortable to make allocations (and staff can be properly paid). Currently, there are 226 funds with at least USD100m under management and this means only about 37 per cent of the industry is of any interest whatsoever to professional allocators. This, however, is a 9 per cent increase from the 28 per cent in 2012."
The first half of 2013 saw a sharp increase in the percentage of Asian funds run from within Asia, in particular out of Hong Kong and Singapore. "We suspect this influx of fund managers into Hong Kong is probably due the proximity of the city to mainland China which is experiencing a slow but revolutionary regulation change in the Chinese securities investment fund laws. Managers are able to register private funds independently without going through a trust company structure and they can also, in certain jurisdictions in Shanghai, under the Qualified Domestic Limited Partners (QDLP) program raise money domestically in China. Thus, we also expect an increase in number of funds running out of China in the near future."