Hedge Fund Intelligence Hedge Fund Intelligence - China

CHINA 2013 ASSET MANAGEMENT The industry’s track record has been mixed. According to Li, in 2010 and 2011 sunshine funds outperformed both the CSI-300 index and the broader mutual fund market. In 2010, he says, hedge funds were up 6.4% versus a rise of 4.37% for equity-based mutual funds and a fall of 12% for the index. In 2011, while the index and mutual funds both fell 25%, hedge funds were down 18%. ASSET MANAGEMENT CHINA 2013 KEY CHARTS Monthly wealth management product issuance 3,500 3,000 2,500 2,000 1,500 1,000 500 0 (Number of products) Dec 09 Dec 10 Jan 12 Feb 13 Issuance by banks Source: CASS, CEIC, Fitch In 2012, however, hedge-style products underperformed – returning an average of 1.24%, versus 5.82% for equity-based mutual funds and 7.55% for the CSI-300 index. “The main reason hedge funds underperformed mutual funds is that they were overweight in cash, whereas mutual funds have to keep at least 60% in equities,” says Li. “Hedge funds were broadly negative on the prospects for the equity market in 2012, so they missed the rally after the fall in 2011.” Others say that in spite of the proliferation of sunshine funds in China, their asset growth has been subdued relative to their potential. “Although the Chinese hedge fund industry continues to expand, its growth hasn’t been as rapid as some people had expected,” says Jerry Wang, CEO of the Hong Kong-based fund of funds specialist, Vision Investment Management. Wang identifies two related reasons why the expansion of so-called sunshine funds has failed to live up to its potential. The first is what he calls the “horrendous” performance of China’s public securities markets. The second is the formidable competition from China’s wealth management products (WMPs), described by Fitch as “a form of informal securitisation, with issuance backed by undisclosed off-balance sheet pools of assets”. This makes WMPs, which are mostly short-dated, similar to mutual funds. According to a recent update from TD Economics, “these characteristics have made them very popular in China, even among small investors tired of earning negative real rates Jerry Wang, CEO of Vision on bank deposits”. The result is that the market for Investment Management WMPs is immense, with a recent Moody’s report >> Although the Chinese putting the total of shadow banking products at an hedge fund industry eye-watering RMB21 trillion, or 39% of GDP. Moody’s describes these products as “relatively continues to expand, non-transparent, loosely regulated, and [carrying] its growth hasn’t been elevated credit risk”. But none of this has weakened as rapid as some people their appeal to Chinese investors. “Year-to-date the CSI-300 index is down 11%, so even a hedge fund had expected >> © HedgeFund Intelligence 24 Special Report September 2013 © HedgeFund Intelligence September 2013 Special Report 25

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