Chinese hedge funds post steep losses in July

Hedge funds investing predominantly in China suffered steep losses in July, as the HFRI China Index declined -7.7 per cent and the Shanghai Composite Index collapsed, falling over -14 per cent in the month, including a single-day decline of -8.5 per cent. 

As a result of these performance losses, total capital invested in Asian hedge funds declined by an estimated USD10 billion in July, this after rising to a record level of USD126.3 billion (784 billion RMB, 15.7 trillion ¥ Japanese Yen) to conclude 1H15, according to the latest HFR Asian Hedge Fund Industry Report, released today by HFR, the established global leader in the indexation, analysis and research of the global hedge fund industry. 

Other areas of the Asian hedge fund industry were also impacted by losses centred on China. The HFRI EM: Asia ex-Japan Index fell -5.6 per cent in July, lowering YTD performance to +4.5 per cent, while the HFRI Japan Index posted a moderate decline of -0.2 per cent for the month, reducing YTD performance to +8.8 per cent.

Prior to the recent performance losses, Asian hedge funds had experienced net asset inflows of USD1.74 billion in 2Q15, the highest quarterly inflow since 1Q14. By investment strategy, inflows were concentrated in Equity Hedge, with these receiving USD1.48 billion of new allocations.  By regional investment focus, Asia ex-Japan received USD1.96 billion of 2Q inflows, while funds focused on Japan and pan-Asia experienced a combined outflow of USD220 million for the quarter.

With the tremendous surge in Chinese market volatility, many listed equities have been suspended from trading, planned IPOs have been halted, and the government has placed certain restrictions on short selling and the use of leverage. Asian hedge fund performance, as well as overall Chinese equity markets, has also been impacted in recent weeks by the establishment of the National Team Funds, which has acted as a liquidity provider to Chinese equity markets. These funds, established by the Chinese governmental entity called China Securities Finance CO. Ltd. (CSF), typically have up to 40 Billion RMB at their disposal.

“Chinese financial markets have come under intense pressure, encompassing not only directional losses, but also liquidity, structural and political pressure, as Chinese equities have posted the sharpest declines since 2007,” says Kenneth J Heinz (pictured), President of HFR. “While this challenging, fluid environment has resulted in mark-to-market losses as many retail investors are forced to liquidate positions, recent developments have created opportunities for long-term, sophisticated strategies and investors. While it is likely that this regional financial turmoil will continue through year-end, creating complex and unpredictable outcomes, hedge fund strategies which reduce and minimize direct equity market beta represent an important tactical opportunity for global investors to participate from exposure to many of these trends while reducing unwanted strategic and structural risks.”