"It’s the [onshore] investors who have become sophisticated and asked for US dollar- denominated assets for diversification," Oriental Patron Investment Management (OPIM) CEO Alvin Fan told FSA.
“They are asking why Tencent and the insurance companies can invest in offshore assets and they themselves can’t. This demand is driving Chinese hedge fund managers to increase their product offerings."
For those mainland hedge fund managers who launch products in the SAR, they used to work in the large mainland financial companies before leaving to set up their own funds.
"Now there are more investment management companies who want offshore products and they are setting up offices in Hong Kong,” Fan said.
OPIM runs an infrastructure platform in Hong Kong which the company says lowers the capital bar for a hedge fund to break even. In addition, the Orient Patron Financial Group together with China Southern Asset Management own Hong Kong-based CSOP Asset Management.
Among the 15 funds currently on the OPIM platform, five funds are run by mainland managers. These hedge funds have seed money primarily from mainland investors with capital already sitting here in Hong Kong.
While most of these hedge funds remain China-focused in terms of investments, they will also invest in China offshore bonds and equities.
“In the future, [the Hong Kong presence] should help them build a track record offshore that can attract money from the US and Europe.”
High demand from China?
One newcomer is Beijing Shenzhoumu Investment Fund Management, a private investment fund (non-retail) manager which has RMB 7bn ($1.04bn) in assets under management. The firm plans a Hong Kong launch of a multi-strategy globally-focused product, which mainly invests in US and Asian equities. However, it will be managed out of Beijing.
Zhou Yuguang, the firm's global head of trading, said the aim is to raise around $20m.
“The main reason is to diversity risks from single A-share assets. Volatility of A-shares have gone up in recent years, coupled with very restricted rules on short-selling. It will have a big impact on returns when the market is bearish,” he said.
He sees high demand coming from investors in big cities of eastern regions, such as Shanghai and Beijing. “They are not familiar with overseas products, but we, as a mainland fund manager, can communicate more easily with them.”
Separately, Charles Wang, ex-CEO of E Fund Management in Hong Kong, who also worked as CIO at Bosera Asset Management, is now chairman of Academia Capital Management, a China hedge fund based in Shenzhen. He aims to introduce his China-focus quant strategy to investors in Asia. It has also received commitment from European institutional investors, he said.
Sour on hedge funds
The two most obvious challenges for these new hedge funds are to demonstrate the capability to invest overseas and to prove that their operational structures, such as corporate governance and risk controls, are fitting for institutional investors to get stable and consistent returns, Fan said.
The first two years are vital, as the death rate is very high for new funds, he said. Some failed cases also overestimated the commitment from the seeders.
Hedge funds have had a hard time. Asia-based hedge funds in particular saw $6.3bn or 10% of total assets withdrawn in the first half of this year, according to data provider eVestment.
In Hong Kong, they have clearly fallen out of favour. Hedge fund NAV as of June 30 fell 63% year-on-year to $49m, the lowest of all products authorised for sale in the SAR, across asset classes, according to the Securities and Futures Commission quarterly report.
Only two hedge funds were registered for sale during the period, the report said.
Source: Securities and Futures Commission