China Sovereign Fund Eyes Asian Hedge Funds to Boost Returns

  • Asia hedge funds set to to outperform U.S., Europe, CIC says
  • Macro funds to struggle while activist funds need patience

China's CIC Eyes Asia Hedge Funds

China’s $814 billion sovereign wealth fund may increase investments in hedge funds in Asia, betting they can beat rivals trading in developed markets.

Hedge fund managers face fewer competitors in Asia, where markets are less efficient and mature than in the U.S. and Europe, said Roslyn Zhang, managing director of fixed income and absolute-return investments at China Investment Corp. Money will probably be allocated to the funds in the next six to 12 months, she said.

“Over the last few years we’ve seen the quality of talent improve a lot,” Zhang said in a telephone interview Wednesday. “The top managers in Asia probably have a better chance of producing more alpha here in Asia than in more developed markets,” she said, referring to profits generated in excess of a benchmark index.

Asian hedge funds outperformed global funds in each calendar year from 2012, returning an annualized 9.5 percent against 5.7 percent in the four years through 2015, according to Eurekahedge, while trailing them so far in 2016. They accounted for just 3.8 percent of the global industry’s $2.9 trillion of assets at the end of June, according to Chicago-based Hedge Fund Research Inc.

The global hedge-fund industry has come under fire this year for lackluster returns, with investors pulling the most money since the aftermath of the financial crisis. Zhang, who at a May conference criticized hedge funds for everything from high fees to crowding into the same trades, said CIC has no plans to follow some U.S. and European pension plans in pulling investments.

CIC, which is based in Beijing, had a 3 percent loss on its overseas investments last year, the first decline in four years, as commodity prices sank, while stock and bond returns were damped by negative interest rates and the strong U.S. dollar. It didn’t disclose the performance of its absolute return investments, which includes hedge funds and accounted for about 13 percent of global holdings at the end of December, according to its latest annual report.

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CIC has previously invested in Asian hedge funds through funds-of-funds, Zhang said, which farm out client money to managers. The state fund in 2011 backed PCA Investments, led by Hu Hang, an alumnus of Platinum Grove Asset Management. PCA shut its multi-strategy hedge fund two years ago after the sovereign wealth fund pulled its money, people familiar with the situation said at the time.

Macro Managers

Zhang said CIC constantly reviews potential and existing managers, and has recently cut holdings in discretionary macro-managers, who bet on economic trends by trading everything from currencies to commodities, following poor performance.

“We think discretionary macro managers are quite challenged in the near future,” she said, declining to name the firms that CIC has withdrawn money from. “The current macro environment is very different from 10 years ago or even a longer time period when the discretionary macro managers cut their teeth.”

Paul Tudor Jones, the billionaire trader who started Tudor Investment Corp. in 1980, and Alan Howard, who co-founded Brevan Howard Asset Management in 2002, are among the macro managers who have suffered investor redemptions amid losses this year.

Zhang, who in May criticized hedge funds for herding into bets against the Chinese currency without really understanding the country, said CIC didn’t cut managers because they were bearish on the yuan or China.

Activist Funds

CIC is being “patient” with the equity and activist hedge funds that it backs and that have posted a wide range of returns, Zhang said.

“I don’t think that investment model is broken,” she said of managers who agitate for change at under-performing companies to boost their share prices.

CIC has been a long-term investor in hedge funds, investing with some for three or four years, and as long as seven years with others, Zhang said.

It has won fee concessions from some managers and is working on winning more. She declined to comment on how much CIC pays on average in fees. Tudor and Och-Ziff Capital Management are among the firms that have trimmed fees this year.

“This is a very welcome trend for the managers, especially those industry leaders, to take a very proactive approach to reduce fees,” Zhang said. “I’m pushing for lower fees publicly and privately with our managers.”

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