Betting on China pays off for Asian hedge funds

Strong performance set to ensure greater capital inflows into mainland funds

PUBLISHED : Saturday, 11 January, 2014, 1:21am
UPDATED : Saturday, 11 January, 2014, 1:21am

For investors in Asian hedge funds, it was China and not the region's hottest major market, Japan, that provided the best bang for the buck last year - a result set to ensure greater capital inflows into steadily growing China-focused funds.

Scoring with heavy bets on internet, technology and casino stocks, hedge funds investing in China gained an average 20 per cent last year compared with a flat MSCI China index, their best showing in five years.

By contrast, Japan-focused equity funds gained an average 26 per cent, data from Eurekahedge showed, lagging a 29 per cent rise in the Nikkei-225 Index in dollar terms - a performance similar to low-cost exchange-traded funds and insufficient to justify hedge funds' hefty fees.

The outperformance helped encourage Chinese capital to emerge as a growing force in an industry that is dominated by US and European institutions such as pension funds.

China funds will also likely build on net inflows last year as top performers such as Avant Capital Eagle Fund and LBN Advisers China fund lure investors. Eurekahedge estimated China funds raised a net US$1.2 billion in 2013, compared with net outflows of US$323 million for Japan funds.

But a repeat performance by Chinese managers as a group this year will be difficult as valuations for so-called new-economy sectors have become stretched, some industry experts say.

"Some of the long-lasting winning sectors and stocks could see sudden breaks," said Theodore Shou, chief investment officer of Skybound Capital.

Chinese technology companies as measured by the IBES MSCI index are trading at 25 times forward 12 months' earnings, compared with just 8.9 times for the MSCI China Index.

Kingsoft, an entertainment software firm, trades at 30 times, 181 per cent higher than its five-year median price-earnings ratio. Internet giant Tencent trades at nearly 35 times.

Shou added that fund managers would have to place a greater emphasis on stock, as opposed to sector, selection, this year.

Short positions in sectors such as commodities and in state-owned companies also helped China funds, portfolio managers and investors said.

"Resources are being allocated away from fixed-asset investments, commodities, real estate into what we call the new economy, namely alternative energy, internet, software, environmental-related stuff," said Benjamin Chang, chief executive at LBN Advisers.