Greater China equity hedge funds ended 2019 up 15.49%, supported by the strong performance of the Chinese equity markets throughout the year on the back of improving geopolitical situations and accommodative central bank policies. The Eurekahedge Greater China Long Short Equities Hedge Fund Index which tracks 55 active Greater China-focused hedge funds utilising equity strategies slumped 14.74% in 2018 as mounting pressure from the escalating trade tension between China and the US weighed on the performance of Chinese equity markets. Volatile trading condition and various political concerns took their toll on Greater China equity hedge funds as they ended nine of the months of 2018 in the red. On top of the tariff spat between the Chinese government and the Trump administration, the continual protests in Hong Kong which resulted from the introduction of an extradition bill in early 2019 has also acted as a major headwind for the city state’s economic outlook throughout the year.
Going into 2020, the escalation of the COVID-19 outbreak, which was eventually designated by the World Health Organisation as a pandemic, weighed on the performance of risk assets in Q1, resulting in the global hedge fund industry registering one of their worst quarters in terms of assets under management (AUM) decline since the 2008 global financial crisis. Lockdown measures and travel restrictions put a brake on economic activities and tilted the global growth outlook downward. The Eurekahedge Greater China Long Short Equities Hedge Fund Index slumped 6.92% over the first quarter of 2020, before gaining 14.36% over the second quarter of the year on the back of the resumption of economic activities across the country. The strong recovery of Greater China equity hedge funds through the quarter has pushed the Eurekahedge Greater China Long Short Equities Hedge Fund Index close to its previous high from January 2018.
Figure 1 below illustrates the performance of the Greater China equity hedge fund managers since the end of 2009 compared to their regional peers across Asia, as well as the underlying equity markets of the country as represented by the CSI 300 Index which tracks 300 large cap A-Share equities in the Shanghai and Shenzhen stock exchanges, and the Hang Seng Index which represents the companies listed in the Hong Kong stock exchange.
Figure 1: Performance of Greater China equity hedge funds against comparable benchmarks since the end of 2009
Greater China equity hedge fund managers have generated an annualised return of 6.60% since the end of 2009, vastly outperforming the two equity benchmarks: the CSI 300 Index and the Hang Seng Index have returned 1.51% and 1.06% per annum respectively over the same period. These fund managers have successfully hedged themselves and suffered smaller losses during periods in which the underlying region’s equity markets were taking a beating, and still managed to capture some of their upward rallies. For comparison, equity hedge fund managers focusing on the entire Asian markets have generated an annualised return of 5.99% since the end of 2009.
Table 1: Performance in numbers – Eurekahedge Trade Finance Hedge Fund Index vs. comparable benchmarks
Eurekahedge Greater China Long Short Equities Hedge Fund Index |
CSI 300 Index |
Hang Seng Index |
Eurekahedge Asia Long Short Equities Hedge Fund Index |
|
|---|---|---|---|---|
2010 |
7.67% |
(12.51%) |
5.32% |
8.02% |
2011 |
(14.27%) |
(25.01%) |
(19.97%) |
(8.99%) |
2012 |
11.97% |
7.55% |
22.91% |
9.49% |
2013 |
21.54% |
(7.65%) |
2.87% |
18.76% |
2014 |
7.52% |
51.66% |
1.28% |
6.46% |
2015 |
10.03% |
5.58% |
(7.16%) |
7.12% |
2016 |
(4.35%) |
(11.28%) |
0.39% |
(0.78%) |
2017 |
31.31% |
21.78% |
35.99% |
19.85% |
2018 |
(14.74%) |
(25.31%) |
(13.61%) |
(11.29%) |
2019 |
15.49% |
36.07% |
9.07% |
10.16% |
June 2020 year-to-date |
6.45% |
2.14% |
(13.35%) |
(1.58%) |
2 year annualised return |
2.59% |
9.17% |
(8.15%) |
(0.99%) |
2 year annualised volatility |
13.59% |
19.00% |
19.42% |
9.88% |
2 year Sharpe ratio (RFR = 2%) |
0.04 |
0.38 |
(0.52) |
(0.30) |
3 year annualised return |
6.30% |
4.50% |
(1.76%) |
1.97% |
3 year annualised volatility |
12.69% |
17.43% |
18.26% |
8.87% |
3 year Sharpe ratio (RFR = 2%) |
0.34 |
0.14 |
(0.21) |
(0.00) |
5 year annualised return |
3.21% |
(1.33%) |
(1.43%) |
1.88% |
5 year annualised volatility |
12.86% |
20.85% |
17.91% |
8.06% |
5 year Sharpe ratio (RFR = 2%) |
0.09 |
(0.16) |
(0.19) |
(0.01) |
5 year maximum drawdown |
(23.91%) |
(40.35%) |
(33.10%) |
(19.31%) |
Table 1 provides the detailed risk return statistics of the four indices shown in the figure above. Key takeaways include:
- The Eurekahedge Greater China Long Short Equities Hedge Fund Index returned 6.45% as of June 2020 year-to-date, outperforming the CSI 300 Index which was up 2.14% over the same period. The Hang Seng Index was down 13.35% over the first half of 2020, as the benchmark failed to stage a strong recovery from the selloffs in the first quarter.
- Over the five-year period ending June 2020, the Eurekahedge Greater China Long Short Equities Hedge Fund Index has returned 3.21% per annum, with an annualised volatility of 12.86%, yielding a Sharpe ratio of 0.09. The two equity benchmarks, as well as the Eurekahedge Asia Long Short Equities Hedge Fund Index have failed to exceed the 2% annual risk-free rate, resulting in negative Sharpe ratios over the last five years.
- Greater China equity funds have recorded a maximum drawdown of 23.91% over the last five years, which occurred following the 2015 Chinese equity market crash. In comparison, the CSI 300 Index and the Hang Seng Index have recorded maximum drawdowns of 40.35% and 33.10% respectively over the last five years.
Table 2 provides the correlation values between the performance of Greater China equity hedge fund managers and the underlying equity market indices since the end of 2009.
Table 2: Correlation matrix
Source: Eurekahedge
The table above shows that the Eurekahedge Greater China Long Short Equities Hedge Fund Index is more strongly correlated to the Hang Seng Index (0.81) than the CSI 300 Index (0.74). There is also a significant correlation between the performance of the index and the performance of equity hedge fund managers focusing on Asia in general.
Figure 2: 12-months rolling Alpha of Greater China equity hedge funds against equity benchmarks
Figure 2 above provides the 12-month rolling alpha of the Eurekahedge Greater China Long Short Equities Hedge Fund Index versus the two underlying equity market indices, assuming a risk-free rate of 0%. As of June 2020, the rolling alpha generated by Greater China equity hedge fund managers stood at 0.37% against the CSI 300 Index, and 1.70% against the Hang Seng Index.
Figures 3a-3b: Breakdown of Greater China equity hedge funds based on their Beta against the CSI 300 & Hang Seng
Figures 3a and 3b above provide the breakdown of the active Greater China equity hedge funds in the Eurekahedge database based on their beta against the CSI 300 Index and the Hang Seng Index. Majority of these funds have a beta of less than 0.5 against the CSI 300 Index, and roughly 33% of them have a beta between 0.5 and 1.0 against the index. Looking at beta exposure against the Hang Seng Index, 11% of the active constituents of the Eurekahedge Greater China Long Short Equities Hedge Fund Index have no less than 1.0 beta, while the remainder are almost equally split into the other two categories.
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