Hedge Fund With 138% Gain Says China Shorts Easier to Spotby
Hao Capital sees many Chinese industries plagued by oversupply
More difficult to identify A shares with potential to rise
Hao Capital Management, whose Greater China-focused hedge fund returned 138 percent this year, said it is easier to identify targets to wager against among yuan-denominated China stocks than to spot those with the potential to rise.
Many of the nation’s industries are plagued by overcapacity, which will lead to slower cash flow growth for companies with A shares listed in China, the manager of the $268 million hedge fund wrote in its October newsletter to investors. The hedge fund, which bets on rising and falling stocks and didn’t mention any specific industries or shares, wrote that companies with strong cash flows are unlikely to see valuations drop to lows seen in previous years.
“It will be more difficult for us to find stocks with attractive upside compared to before,” according to the newsletter. “At the moment, we find it easier to identify targets for short positions than for long positions.”
F&H Fund Management, the asset manager co-founded by the former chief technology officer of Alibaba Group Holding Ltd., said this month that the firm is getting “more and more bearish” on China and Asia. The rout that wiped as much as $5 trillion off China’s stock-market value this year has prompted bargain hunting by some, while others say shares will resume their decline when the government withdraws support. Government intervention to stimulate growth has helped the Shanghai Composite Index rebound 25 percent from this year’s low in August.
While it might be easier to identify bearish wagers against individual shares listed in China, it is much harder to execute them. Chinese authorities have cracked down on practices including so-called “malicious” short-selling as part its attempt to “purify” the market. Supply of individual shares that would enable shorting has also dried up following the market selloff.
Volumes on the country’s stock-index futures market have shrunk 99 percent after authorities blamed the contracts for exacerbating the rout. Regulatory curbs on short selling have contributed to a 71 percent tumble in bearish wagers in China.
Hao Capital’s hedge fund had no short holdings in China-listed A shares as of October, according to the newsletter. It did have short exposure to Hong Kong- and U.S.-listed shares.
Hao Capital is led by Chief Investment Officer Zhang Hao, a former analyst of Prime Capital who researched companies for its then $2 billion Greater China-focused hedge fund, according to a March 2015 marketing document seen by Bloomberg. Eva Feng, Hao Capital’s Hong Kong-based chief operating officer, declined to comment on the newsletter, citing the private nature of the fund.
Hao Capital invests in Chinese stocks listed domestically, as well as those traded in Hong Kong and the U.S. It more than doubled its assets since April 10, according to the newsletter and the marketing document. It returned 16 percent in October, bringing the fund’s gain since its August 2014 inception to 180 percent. The Eurekahedge Greater China Hedge Fund Index climbed 9 percent this year.
The recent rally of A-shares has been driven by abundant capital in the country, according to Hao Capital’s commentary. More than 10 percentage points of the hedge fund’s return in October came from U.S.-listed stocks, according to the newsletter. Hong Kong-traded shares contributed 4 percentage points and China-quoted stocks 1.6 percentage points.
Capacity utilization in the industrial sector is close to lows last seen in the aftermath of the financial crisis that started in 2008, according to data compiled by Bloomberg Intelligence. Data showing slowing credit growth in China this month have added to signals of an economic slowdown, including falling exports, tame inflation and moderating industrial output. The readings underscore the government’s challenge to kick start growth in an economy weighed by overcapacity and debt.
"Clearing up the excess capacity and improving the efficiency of the companies are the two options available -- both of which would involve reforms and structural adjustments,” according to its newsletter. "An economic overhaul would inevitably put the powerful vested interests at stake. Therefore, we’re cautiously optimistic over reforms in China.”