Hedge funds exit China property bonds after booking triple digit gains
- Shanghai Bull Asset Management is concerned about the sector’s debt burden and has sold all its CIFI Holdings Group bonds after purchases of those beaten down assets helped spur a 523% increase in its distressed-debt strategy in 2022
- Shanghai Silver Leaf Investment which booked a 136% gain last year using interest-rate swaps, has dumped almost its entire portfolio of home builder bonds it scooped up late last year in a high-yield strategy when policy easing boosted prices
One of China’s best-performing hedge funds has exited a lucrative wager on property bonds, joining several peers in unwinding bets on the nation’s economic recovery.
Shanghai Bull Asset Management Co. is concerned about the sector’s debt burden and has sold all its CIFI Holdings Group Co. bonds after purchases of those beaten down assets helped spur a 523% increase in its distressed-debt strategy in 2022. Shanghai Silver Leaf Investment Co., which booked a 136% gain last year using interest-rate swaps, has dumped almost its entire portfolio of home builder bonds it scooped up late last year in a high-yield strategy when policy easing boosted prices.
The prevalence of caution from top-performing fund managers comes despite early signs of stabilisation in real estate, a key industry that policymakers are trying to support to revive the economy. The liquidity crunch among Chinese developers fuelled record defaults last year in an industry that has been a vital engine of growth.
“An industry-wide recovery won’t happen any time soon,” said Bull Asset Chief Investment Officer Shi Yafei, who helps oversee more than 1 billion yuan (US$146 million). “For the rest of the year, less strong developers will still run into problems, and even some relatively high-quality companies could also face liquidity issues.”
Developer bonds have stabilised after the surge at the end of last year. Meantime, a rebound in consumer spending and industrial output in the first quarter of 2023 are adding to optimism a recovery could be sustained, along with rising home sales.
The remainder of 2023 will be a harder environment to generate industry-beating returns as structural distortions in the bond market that fuelled a surge in yields last year disappear, according to Zhang Mudong, who helps manage a macro strategy at Silver Leaf. The reopening optimism triggered declines in bond prices and prompted investors in wealth management products and funds to redeem, fuelling further drops that drove up yields.