Research

Special Report: Greater China Hedge Funds

Introduction

Along with this month’s key trends in Asian hedge funds report, we include a feature on Greater China, a region which has made headlines since late-2014. Chinese authorities have sought active intervention in the markets with a series of interest rate cuts, municipal debt-swap programs and ease of banking restrictions through reserve ratio cuts and loan deposit ratios in an attempt to inject the Chinese economy with further liquidity. As such, Greater China mandated hedge funds have seen strong growth in the beginning of the year as the Chinese equity markets rallied on the backs of relaxed capital controls and improving infrastructure and policy to support the booming Chinese equity market.

Greater China mandated hedge funds also saw impressive returns especially in the first and second quarter of 2015; however this was short-lived as economic indicators pointed to slowing Chinese growth, setting investors into market panic. Following that, Chinese authorities intervened in the stock market with attempts to stabilize the market through providing further liquidity support and suspension of share sales by major investors in the stock market.

Figure 1 shows the industry growth of Greater China hedge funds on an annual basis since 2011. Asset growth has seen a steady increase since 2013 climbing steadily from late 2014 to 2015 year-to-date as policies and infrastructures supporting the Chinese equity markets were implemented. After a muted 2012, Greater China hedge funds saw increasing investor allocation in 2013 and 2014 following returns of 19.30% and 7.57% in both years respectively. Investor inflows were the main source of asset growth into Greater China between 2013 and 2014, cumulatively seeing investor inflows totalling US$6.1 billion while performance-driven gains cumulatively stood at US$4.3 billion over the same period. Concerns over the Chinese economic growth saw equity markets into decline in 2H 2015 while inadequate policy undertaken by the Chinese government arrested this development causing losses to Greater China mandated hedge funds. The total assets under management (AUM) for Greater China mandated hedge funds currently stand at US$21.6 billion.

Figure 1: Annual asset growth since 2011
 

Industry composition and growth trends

Figure 2 shows the breakdown of headquarter location for Greater China mandated hedge funds. As of July 2015, majority of the Greater China mandated hedge funds are headquartered in Hong Kong, to take advantage of their relatively relaxed regulations compared to China, as well as the close proximity to the Mainland. The launch of the Shanghai-Hong Kong Stock Connect in Hong Kong enabled mutual market access into ‘A’ shares in its initial stages between Mainland China and Hong Kong for local and foreign investors alike who in the past were limited by the RQFII (Renminbi Qualified Foreign Institutional Investor) quotas. The market share of Hong Kong hosting Greater China mandated hedge funds has grown from 62% in 2008 to 81% in July 2015, while the share of Mainland-based funds has decreased since then from 8% in 2008 to 3% in 2015.

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