Hedge funds outshine their mutual rivals

China’s largest 140 hedge fund houses (of 420 in total) have more than 10 billion yuan worth of assets under management

PUBLISHED : Wednesday, 12 October, 2016, 2:40pm
UPDATED : Wednesday, 12 October, 2016, 10:54pm

A tug of war is taking shape between the mainland’s hedge funds and mutual funds, as investors increasingly seek better ways of earning off their assets, amid a slowing economy and worsening business climate.

According to the Asset Management Association of China, the total value of funds raised via private offerings topped 8 trillion yuan by the end of August, that’s practically on a par with the assets managed by the mutual funds.

But analysts say the figure is likely to be eclipsed soon by fast-growing hedge funds, which are increasing in popularity, especially among high-net-worth individuals who continue to develop a greater appetite for high risk investment.

“Hedge fund managers can generate higher returns for me and that’s why I vote for them,” said Zhou Di, one seasoned equity investor in Shanghai.

“It’s a no-brainer we should let more capable people manage our hard-earned money.”

Mutual funds used to dominate the mainland’s securities investment market with Beijing banking on the institutions to set a healthy tone for the volatile market, with their decisions based on solid fundamentals and valuations.

On the other hand, the regulators had a dimmer view on the growth of hedge funds, worried that their bolder, more aggressive strategies could result in roller-coaster rides for the fledging investment market.

It wasn’t until 2004 when the China Securities Regulatory Commission (CSRC) started to liberalise the hedge fund sector, but the funds could still only be launched via trust firms.

Hedge fund managers can generate higher returns for me and that’s why I vote for them. It’s a no-brainer we should let more capable people manage our hard-earned money
Zhou Di, a seasoned equity investor, based in Shanghai

Ever since, however, hedge fund growth has been on the fast track, despite their high volatility.

Early this year, the CSRC published new rules on the hedge fund sector, enabling asset managers to easily raise funds as long as they registered their products with the China Asset Management Association, the self-regulatory organisation that represents the mutual fund industry.

The number of hedge funds has now soared from around 1,000 in 2012, to nearly 40,000.

Their performances vary largely, but the best of them have delivered investment returns of more than 100 per cent, while some of the worst have posted losses of up to 50 per cent.

Of the now 420 hedge fund houses, the largest 140 have more than 10 billion yuan worth of assets under management.

By June, the mainland’s 108 mutual fund companies saw their assets under management decline 5.25 per cent from the end of 2015, according to Shanghai-based data provider Wind Information, a situation exacerbated by hundreds of managers jumping ship to join hedge funds, which are seen as offering better pay and benefits.

Mutual funds are also subject stricter regulatory requirements such as the minimum percentage of equities held by them, making it difficult for fund managers to dodge a bear run even though they may have predicted a sharp fall ahead.

Wang Feng, chairman of Ye Lang Capital, however is adamant that hedge funds now offer “star managers a greater flexibility in managing the assets, and sooner or later, they will become the first choice for cash-rich investors”.

Their great appeal for many, he adds, is they can design quantitative investment strategies, or programmed trading, to chase stable returns while mutual funds still face restrictions on that.

Another issue highlighted recently is that mutual fund managers often feel they are overworked, with many admitting they lack the experience of their hedge counterparts.

According to a report in the Securities Times, the average asset manager with a mutual fund house has to take care of 2.3 funds. The busiest in the market was named as Chen Kaiyang, who overseas 32 funds at Bosera Asset Management.

Last month, stock-focused mutual funds reported a 1.65 per cent loss in net asset value in tandem with a weak market.

“That wasn’t too bad a performance, but it was beaten by some of the better-performing hedge funds,” said Zhou Di. “I like to take risky bets and I have been rewarded with 30 per cent investment return so far this year.”

Depreciation of the yuan has prompted more wealthy mainlanders to diversify their savings into equities and property investment, including shares and homes abroad.

“It’s a good sign that more talented youngsters, including fund managers at mutual fund companies and new university graduates, are flocking to hedge funds to advance their careers,” said Gu Weiyong, chief executive of Shanghai Ucon Investment. “The outlook is bullish for hedge funds.”