Asia Hedge Funds Hit Record on China Rally That’s Buckling

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Asia’s hedge funds boosted their assets to a record $177 billion in May by riding a Chinese stocks rally that’s now starting to falter.

Investments by funds with an Asia mandate exceeded the $176 billion in December 2007, before the global financial crisis, Alexander Mearns, chief executive officer of Singapore-based data provider Eurekahedge Pte, said in an interview on June 17.

“China is the shining star in terms of returns,” Mearns said. “If we are seeing the same inflows as last year, and if the performance continues at the pace we have seen, Asia’s hedge-fund industry could cross the $200 billion mark very soon.” North America hedge-fund assets under management are $1.5 trillion, according to Eurekahedge.

China’s market capitalization has almost doubled to $9.6 trillion this year, helping the returns of hedge funds investing in the country. Future gains may be limited as bearish sentiment is spreading with the benchmark Shanghai Composite Index poised to enter a correction after it dropped more than 10 percent from a June 12 peak.

An end to the China rally would “wipe out a lot of the organic growth that we have seen that has come from performance over the last quarters,” said Mohammad Hassan, a Eurekahedge analyst.

Stretched Valuations

The Shanghai gauge retreated 13 percent this week, signaling a correction. It has more than doubled in the past 12 months and trades at 18 times 12-month projected earnings.

“We are seeing stretched valuations in China’s stock markets,” said Melvyn Teo, professor of finance at Singapore Management University. “If there is a correction, that will definitely affect the equity long-short hedge funds investing in the market, especially those that have not capped their downside risk.”

The Eurekahedge Greater China Hedge Fund Index has gained 25 percent this year, helping make hedge funds in Asia the best performers globally. The Eurekahedge Asian Hedge Fund Index advanced 11 percent to the end of May, more than the 2.8 percent gain in the North America index and the 6.4 percent increase in the Europe gauge.

Assets under management of Asia-focused funds have grown by 10 percent, or $16 billion, during the first five months, Hassan said. About $4 billion came from net inflows and $12 billion from performance.

Hedge funds investing in China make up about 40 percent of all hedge-fund assets invested in Asia. The $3.8 billion APS China A Share Fund and related accounts under the same strategy returned 67 percent this year to the end of May, while the Golden China Fund returned 25 percent.

Among other funds, the Helios Strategic Fund investing in India gained 15 percent till the end of May.

Exotic Strategies

Asia’s hedge-fund industry has matured, Mearns said. While long-short equity funds, which bet on rising and falling stock prices, made up about 70 percent of all funds investing in the region in 2002, the proportion has shrunk to 55 percent in 2007 and 39 percent in 2015.

By contrast, the share of funds employing more complex strategies has increased. Multistrategy funds now account for 22 percent from 14 percent in 2007 and the share of macro funds, which bet on economic developments, has increased to 10 percent from 6 percent, according to Eurekahedge.

“Exotic strategies were difficult to implement some years ago,” Mearns said. “Even long-short was difficult because shorting was either prohibitively expensive or impossible in many markets.”

Up to the end of May, 25 funds started in Asia, half compared to the same period last year, according to Eurekahedge.

Asia’s lack of many hedge funds with assets of $1 billion or larger is still preventing institutional investors from allocating to the region, Hassan said.

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