Across The Border

Chinese hedge fund liquidations touch record in first half amid poor market performance

More than 200 had to halt operations January-June after crashing below the liquidation value

PUBLISHED : Sunday, 14 August, 2016, 5:15pm
UPDATED : Sunday, 14 August, 2016, 9:24pm

A record number of hedge funds in China were forced to liquidate owing to woeful performance in the first half of this year, exacerbating the bearish sentiment on the weak A-share market.

According to Beijing Gesafe Wealth Advisory, more than 200 hedge funds had to halt operations between January and June after they crashed below the liquidation value.

As the hedge funds suffered a setback when investors’ risk appetite appeared to be low following a stock market rout last year, it also added uncertainties to the long-term development of the country’s capital market where regulators hoped to bolster institutional buying to avert bumpy rides.

“Taking a long view, hedge funds will continue to grow buoyed by mainlanders’ increasing wealth and rising awareness of managing their net worth,” said Ivan Shi, research head of fund consultancy Z-Ben Advisors. “But the recent wave of liquidations and the lacklustre performance could weigh on rich people at the moment. After all, the market lacks buying interest.”

Hedge funds were also victims of the pessimism surrounding the A-share market because the majority of investors choose to shy away from equity investment
Shen Ye, hedge fund manager

Hedge fund managers had their day in the sun during the first half of 2015 when a strong rally sent the key indicator up by more than 100 per cent spurred by swelling margin trading.

In the first six months of 2015, nearly 7,700 new hedge funds were launched on the A-share market with an influx of fresh capital.

At that time, millions of investors were convinced that the upsurge would be supported by the government as the Communist Party’s propaganda machine touted the rally as a result of the drastic reforms on the mainland economy.

The market peaked in mid-June before panic selling wiped out total capitalisation of US$5 trillion by late August last year.

The China Securities Regulatory Commission (CSRC) then restricted trading of stock-index futures as it blamed malicious short selling for the boom-to-bust cycle that left millions of investors to carry the bag.

The restriction put up a stumbling block on the operations of hedge funds that used algorithms, a quantitative investment strategy, to chase profits on the equity markets.

“Regulatory hurdles affected operations of hedge funds,” said Shen Ye, a Shanghai-based hedge fund manager. “But the hedge funds were also victims of the pessimism surrounding the A-share market because the majority of investors choose to shy away from equity investment.”

On the mainland, the psyches of investors, not the fundamentals, is the major driving force for the index movement.

Unlike mature markets in the West where institutional buying dominates shares trading, China’s more than 100 million retail investors take a lion’s share of turnover on the Shanghai and Shenzhen stock exchanges.

The regulator has been striving to bolster institutional buying, hoping to set a healthy tone for the volatile market while encouraging investors to focus on economic and corporate fundamentals.

But the efforts have yet to generate concrete outcomes.

Retail investors heavily borrowed money from brokerages or the underground banking system to buy shares, chasing short-term gains, only to get burned amid the market crash in mid-June.

In the past five years, hedge funds grew fast as hundreds of managers with mutual funds set up their own shops managing assets for high-net-worth mainlanders.

A star hedge fund manager could earn 20 million yuan a year, several times his pay at a mutual fund house.

But there are fresh signs that the hedge fund sector is undergoing a nuclear winter due to weak market sentiment.

According to Gesafe, only seven managers left mutual fund companies to go to hedge funds in the first half of 2016.

In the same period, a combined 93 money managers resigned from mutual fund houses with the majority of them moving to other institutions such as brokerages and insurers.

“They might go back to hedge funds when fundraising turns out to be easy,” said Shi. “It’s just a matter of time.”