6/19/2015

China's hedge fund industry blooms as stocks boom - FT.com

June14,20156:02am

China's hedge fund industry blooms as stocks

boom
GabrielWildauinShanghai

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Bloomberg

More than 4,000 new Chinese hedge and private equity funds have launched in the last
three months, fuelling a mass exodus from traditional investment houses, as ambitious fund
managers seek to profit from the country's booming stock market.
The number of private investment funds including securities, private equity, and venture
capital totalled 12,285 by the end of May, up from 7,989 three months earlier, figures
from China's securities regulator show. Assets under management increased by $75bn to
$433bn.
The Shanghai Composite index closed at a seven-year high on
Friday and is up 150 per cent over the past year. The small-cap, tech-focused ChiNext board
in Shenzhen has more than tripled in the last year.
Feng Gang, chairman of hedge fund WinSure Capital, said the government is encouraging
entrepreneurship in finance. He launched his fund in January after 14 years at Chinese
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6/19/2015

China's hedge fund industry blooms as stocks boom - FT.com

mutual fund companies, most recently China International Fund Management, a joint
venture with JPMorgan Chase.
"In the past 14 years I've never seen regulators so encouraging of innovation. In the
investment industry, we're taking the lead."
Last February, the government switched to a streamlined registration procedure for private
equity and hedge funds, abandoning the more onerous approval process.
Employees at hedge and private equity funds have risen by over 60,000 in three months,
topping 199,000 by the end of May.
"More than half of our research team has left over the past year to join hedge funds," said a
vice-president for institutional business at a large Chinese securities brokerage in Shanghai.
"It's the same with our [mutual fund] clients. Now all the fund managers are 'post-80s'," she
said, referring to those born after 1980.
Chinese hedge funds differ from western counterparts in key respects. Where western funds
mainly rely on institutional investors, Chinese hedge funds draw from retail investors, using
banks and brokerages as sales channels.
A typical Chinese hedge fund has a minimum
investment of only $161,000 and a lock-up
period of 12 months, while western hedge funds
typically require an investment of at least $1m
and longer lock-up periods.
Chinese hedge funds are also small on average.
Of the 12,285 registered funds, only 56 manage
more than Rmb10bn ($1.6bn) in assets.
Most Chinese hedge funds follow long-only
strategies, as short selling is possible in China
only for large-cap shares. Even that is difficult
due to limitations on securities lending.
In addition, an absence of available derivatives products hinders fund managers' ability to
use hedging strategies common in developed markets.
Higher pay is the biggest factor luring asset managers away from brokerages and fund
houses towards hedge funds.
Chinese funds use a pay structure similar to
that of western funds, taking a 20 per cent cut
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6/19/2015

China's hedge fund industry blooms as stocks boom - FT.com

of profits. Some more established fund

managers also take a fee worth 1-2 per cent of
assets under management, as in the west.
Despite the proliferation of new funds, industry
observers say many are now struggling with a
wave of redemptions as investors seek to lock in
profits after a year of strong gains.
Asset returns, rather than net inflows, likely
account for the bulk of the $75bn increase in
assets under management since March.
Analysts suspect reallocation of savings from a
now richly valued stock market back to the property market helps explain why housing sales
have rebounded and prices have stabilisedfollowing months of decline.
While hedge fund assets under management have continued to grow globally in recent years,
they have been increasingly concentrated in the largest hedge funds and not start-ups.
According to Prequin, the data provider, 92 per cent of hedge fund assets are held by the top
11 per cent of fund managers.
AdditionalreportingbyMaNaninShanghaiandMilesJohnsoninLondon
Twitter:@gabewildau
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