Obscure Chinese hedge funds’ high-yield bond strategies pay off amid turbulence in property sector

Chinese hedge funds pocket returns of as much as 320 per cent, but global asset managers get caught in high-yield bond meltdown

Top performing fixed-income hedge funds in China are now turning more cautious as they expect risks to rise further

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Chinese hedge funds struck gold with their high-risk bond strategies involving distressed real estate companies. Photo: Bloomberg

Published: 4:21pm, 21 Feb 2022

As default risks surrounding troubled issuers like China Evergrande Group rocked the nation’s bond markets last year and left global investors nursing losses, a handful of little-known hedge funds swooped in.

Shenzhen Qianhai Guoen Capital Management, Fuhui Juli Wealth Management and Shenzhen Qianhai Jiuying Asset Management, which between them manage more than 20 billion yuan (US$3.2 billion), pocketed gains of 319 per cent, 104 per cent and 96 per cent, respectively, under their high-yield strategies, after scooping up distressed debts issued by property firms and local government financing vehicles.

The returns are all the more surprising as turbulence in China’s real estate sector caught out global asset managers including arms of Prudential and UBS Group. And as firms like T. Rowe Price Group, Allianz Global Investors and Goldman Sachs Asset Management seek to tap opportunities from the stressed sector, top performing fixed-income hedge funds in China are now turning more cautious because they see risks rising further.

While last year’s gains were outliers and often boosted by concentrated bets, the price swings helped China’s private bond funds – the local equivalent of hedge funds – garner an 8.9 per cent average return overall, the best in at least five years, according to Shenzhen PaiPaiWang Investment & Management, a local research provider. That is more than double the 4.2 per cent return in the Eurekahedge Fixed Income Hedge Fund Index.

For Fuhui Juli, which manages less than US$80 million, opportunities arose way back in March when China Fortune Land Development became the first developer to suffer a payment failure since Beijing tightened controls of the debt-ridden sector.