Hedge Fund Crowd Acts Like Chinese Retail Traders, CIC Says

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  • China wealth fund director blames managers for herd mentality
  • Zhang says she's disappointed by hedge fund performance

China Investment Corp.’s Roslyn Zhang, a managing director at the nation’s sovereign wealth fund, criticized hedge fund managers for everything from herding into bets against the yuan to lacking skills to make money.

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“Over the last couple years I’m kind of disappointed by the performance,” she said Wednesday at the SkyBridge Alternatives Conference in Las Vegas. Zhang, who oversees fixed-income and absolute-return investments, said CIC is a “sizable” investor in the industry.

Chinese individual investors have been faulted for crowding into markets and driving up prices, but hedge fund managers are equally to blame for their “herd mentality,” Zhang said. She criticized widespread betting against the Chinese yuan, a wager made by many hedge fund managers that the sovereign wealth fund invests in.

“All kinds of strategies, they run different strategies, they all have the same trade,” Zhang said. "They really don’t know much about China, but they just spend two seconds and put on the trade. Should we pay 2 and 20 for treatment like this?" she said, referring to the industry’s fees.

Fevered trading by Chinese individual investors helped drive a boom in mainland stocks last year that collapsed in June, wiping out $5 trillion of market value. This year, money has poured into China’s commodities futures, prompting regulators to enact trading curbs and warn against speculative bets.

Hedge fund managers are among the highest paid in the finance industry, traditionally charging 2 percent of assets as a management fee and 20 percent of profits. Their fees have been criticized by investors including billionaire Warren Buffett. Investment pools tracked by Hedge Fund Research globally edged up just 0.3 percent in the first four months this year after a 1.1 percent retreat in 2015.

Zhang made the case that China’s economy continues to be strong, despite the recent wave of hedge fund managers betting on a hard landing. She said China’s leverage and military infrastructure are tiny compared with those in the U.S. Heavy building is necessary to support the country’s massive population and China could absorb even more construction, she said.

Heated Exchange

“If you’re worried about China, you should be twice as worried about here,” she said.

The International Monetary Fund projects a 6 percent expansion on average over the coming five years, below a target set by China’s communist leadership.

Zhang’s comments sparked a heated exchange between panelists Don Brownstein, founder of Structured Portfolio Management, and Milton Berg, founder of MB Advisors.

“I would rather put my money with a communist government than a capitalist government,” Brownstein said, without elaborating.

Berg said investors need look no further for evidence of China’s weakness than its stock market, which has dropped about 20 percent this year, while the S&P 500 has gained about 2 percent.

Zhang said money managers need a new skill set in order to make money in today’s markets.

"Only less than 10 percent of managers are actually capable of adapting to the new reality," she said, without providing details. "Probably 90 percent of the managers think they are part of the 10 percent anyway."

CIC’s assets were more than $740 billion as of the end of 2014, according to the fund’s latest annual report.