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The Eurekahedge Greater China Hedge Fund Index was down 4.20% in July, reducing its year-to-date return to 1.66%. In comparison, the underlying equity market in the region as represented by the MSCI China Golden Dragon IMI recorded a loss of 9.60% over the same period. A month after Didi Global Inc. celebrated its debut in the NYSE which makes them the biggest IPO of Chinese companies listed in the US, Beijing abruptly announced a stricter policy for domestic companies listing offshore, particularly in the US. The move by the government of China raised concerns among investors who fear a wave of potential delisting of Chinese companies in the US. As a result, the region's equity market experienced a massive sell-off during the month, with the Hang Seng down by 9.94%, while China’s Shanghai Composite fell 5.40% throughout the month. Looking back at 2020, Greater China fund managers benefitted from the strong performance of the equity market in the region, supported by the rapid recovery of the Chinese economy from the pandemic. Greater China hedge fund managers gained 35.96% over the year, posting their best annual performance since 2009.

Figure 1 illustrates the performance of the Greater China hedge fund managers since the end of 2010 compared to their broader Asia ex-Japan peers, underlying equity market focused on China and the broader emerging market as represented by the MSCI China Golden Dragon Index IMI and the MSCI Emerging Markets Index IMI respectively.

Figure 1: Performance of Greater China hedge funds against other investment vehicles since 2010

The figure above shows that the Eurekahedge Greater China Hedge Fund Index generated an annualised return of 8.94% since end-2010, outperforming their broader Asia ex-Japan peers as represented by the Eurekahedge Asia ex-Japan Hedge Fund Index which returned 7.41% per annum. In recent years, Chinese hedge funds posted very strong annual returns as the US-China trade conflict eased in 2019 and the quick recovery of the Chinese economy in 2020 boosted the equity market in the region. In the same vein, the MSCI China Golden Dragon Index and the MSCI Emerging Markets Index posted an annualised return of 3.93% and 4.11% respectively since end-2010, sharply underperforming the Chinese fund managers.

Table 1: Performance in numbers: Greater China hedge funds against other investment vehicles

Source: Eurekahedge

Table 1 provides the detailed risk return statistics of the four indices shown in the figure above. Key takeaways include:

1. Over the last three, five and ten-year periods, Greater China hedge funds posted the highest annualised return of 13.15%, 12.95% and 9.45% respectively. However, in terms of annualised standard deviation, Chinese fund managers posted higher annualised volatilities on average compared to their broader Asia ex-Japan peers.
2. Supported by their higher annualised return, Greater China hedge funds also posted the best risk-adjusted return over the last three and five years as seen in their Sharpe ratio of 0.90 and 1.02 respectively. In the same vein, over the last three, five and ten-year periods, the Greater China mandate outperformed both the underlying equity market in China and the broader Asia Pacific ex-Japan region in terms of annualised standard deviation.
3. In terms of annual performance, Greater China hedge funds outperformed the MSCI China Golden Dragon Index IMI seven times out of eleven years since 2011. In comparison with the MSCI Asia Pacific ex-Japan Index IMI, the Greater China mandate beat the index eight out of eleven years over the same period.
   

Table 2 provides the correlation values between the performance of ESG fund managers against the benchmark indices and non-ESG equity fund managers. ESG compliant funds displayed a strong correlation against both the MSCI ACWI ESG Leaders Index and the Eurekahedge Equity ex-ESG Fund Index.

Table 2: Correlation matrix

Source: Eurekahedge

Table 2 shows the correlation matrix of the Eurekahedge Greater China Hedge Fund Index and other investment vehicles. By surprise, Asia ex-Japan hedge funds have a stronger positive correlation to MSCI China Golden Dragon Index of 0.88 compared to 0.85 of Greater China hedge funds. In the same vein, Greater China hedge funds also have a lower positive correlation of 0.79 with MSCI Asia Pacific ex Japan Index IMI compared to 0.91 of broader Asia ex-Japan hedge funds. This indicates that on average, Greater China mandates provide better diversification against the underlying equity market compared to their Asia ex-Japan counterparts.

Figure 2: 12-month rolling Alpha of Greater China hedge funds against the underlying equity market and broader Asia ex-Japan hedge funds

Figure 2 shows the 12-month rolling alpha of Greater China hedge funds against the underlying equity market and its broader Asia ex-Japan peers. In 2015 prior to the stock market crash in China, the Greater China hedge funds generated positive alphas against the two benchmarks fueled by the strong rally of the equity market in the region. It is also worth noting that the mandate only posted negative alphas against the two-benchmark markets in early 2016 and 2018 which was due to the Chinese stock market crash and US-China trade conflict, resulting in a challenging trading environment for the Chinese hedge funds. In the recent period, Greater China hedge funds recorded a positive alpha as high as 2.0% against the MSCI Asia Pacific ex Japan Index and 0.93% against their broader Asia ex-Japan peers.

Figure 3: Annual performance distribution of Greater China hedge funds

Figure 3 shows the annual performance distribution of Greater China hedge funds over the last seven years. The top 10% of Greater China fund managers generated at least 30% return during four out of the last seven years, with the lowest return of 30.95% in 2015 and the highest return of 81.91% in 2020. In the same vein, for four out of seven years, the bottom 10% of the mandate had not recorded losses of more than -7.0%. It is also worth noting that in 2018, the Bottom 10% recorded the sharpest loss of 29.29%, while the Top 10% gained only 7.93% return as the escalation of the US-China trade war acted as headwinds to the performance of the fund managers.

In recent years, Greater China hedge funds were undoubtedly the best performing region in the industry as evidenced by their performance in 2019 and 2020. However, fund managers face daunting challenges which arose recently, with the new regulatory changes resulting in Chinese equities becoming less attractive for foreign investors and the impending collapse of Evergrande which we expect could heavily impact the performance of Greater China hedge funds in the near future. The restrictions imposed by the Chinese government on foreign investors in their market will pose challenges to hedge funds managers as it limits their ability to hedge against potential market uncertainties, which will cause their performance to exhibit a higher correlation with the equity market. Having said that, the Chinese government is likely to do everything they can to mitigate the negative impact from Evergrande’s debt crisis and ensure that the financial system continues to remain stable.

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