Back in November 1999 the launch of the Hong Kong Tracker Fund raised HK$33 billion, mostly from small investors. It was an enormous amount; more than US$4 billion. Today it looks puny. In the last few weeks, the first two stock funds to be rolled out to mainland investors under the country's qualified domestic institutional investor scheme have each raised more than that. And that understates the true level of demand. Together, the two funds received subscriptions from investors worth a thumping 111 billion yuan, or almost US$15 billion; nearly four times the amount raised by the Tracker Fund. Shanghai-based research house Z-Ben Advisors expects four more QDII mutual funds to hit the market before the end of the year, raising another US$20 billion. By the end of next year, Z-Ben reckons there will be 24 QDII funds with assets totalling US$65 billion. Initially at least, much of that will be invested in Hong Kong. The first QDII fund, launched by the China Asset Management Company, is thought likely to invest as much as 30 per cent of its money in the Hong Kong market. For mainland fund managers, Hong Kong-listed H shares are an easy pick. They offer familiar companies trading at a average discount of 45 per cent to mainland A-share prices. Yet with the weight of money heading this way, the price differential between H and A shares is likely to narrow fast. Since August 20 when Beijing announced its 'through train' plan to allow individual mainland investors to buy shares in Hong Kong, the Hang Seng China AH Premium Index, which measures the gap, has dropped from a high of 184 to hit 150 (see chart). As the A-share premium is eroded further, latecomers to the QDII market will find it harder and harder to earn the returns they expect. H shares will begin to look expensive, and equity markets elsewhere are unlikely to provide the 100 per cent annual returns mainland investors have come to regard as normal. Donald Straszheim at investment firm Roth Capital Partners warns that the current rally in H shares could turn into a re-run of the 2001 bull market in B shares. Back in February 2001, when the authorities first allowed mainland investors to buy US dollar-denominated B shares on mainland exchanges, B shares were languishing at a price to earnings ratio of 20, while A shares were trading at a buoyant 60 times earnings. Within weeks the Shanghai B-Share Index tripled in value, with valuations also reaching 60 times earnings. Alas, the frenzy did not last. With the easy money snatched off the table, interest waned and B shares began to slide. By mid-2005, B-share prices were back below where they had started in 2001 (see chart). Something similar could be about to happen with H shares. Once the easy returns have been picked up and fund performance starts to slacken, mainland investor enthusiasm for overseas markets could begin to wane. Z-Ben predicts 'sharp outflows' from QDII funds beginning early next year as disappointed investors withdraw their money. In the short term, of course, that still leaves H-share prices a long way to run from current levels. But get ready to jump off the train before it hits the buffers.