Chinese Funds Look to Hedge Their Bets to protect themselves during market declines

Chinese Funds Look to Hedge Their Bets

CHAO DENG

Dec. 30, 2013 7:31 a.m. ET

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Chinese funds focused on the nation’s domestic stocks are increasingly looking to hedge their bets. While short selling, or betting that a stock’s price will fall, remains uncommon in China because of the high cost of borrowing stocks, hedge funds are using CSI-300 index futures and other methods to limit their risk. And fund managers say they expect regulators to roll out more products that will allow them to better hedge in the future.

“More and more [local] funds are using hedging strategies” to protect themselves during market declines, said Martin Bao, assistant portfolio manager at Shanghai-based Broadvision Investment Management, which buys shares in high-growth sectors such as technology and Internet while selling CSI-300 index futures.

Mr. Bao said the index futures are commonly used to offset risk in long positions. “Short positions on the index futures are much larger than long positions. There’s a growing trend of funds becoming market neutral” by using the index futures as a way to help “lock in profit,” he said.

Broadvision’s funds have returned roughly 17% each year since it began investing in China in 2008, according to Mr. Bao, who declined to disclose details of the firm’s holdings. Broadvision has up to 1.5 billion yuan (US$250 million) invested in the mainland.

Chinese hedge funds this year have delivered robust returns by focusing on fast-growing sectors including technology, media and health care and hedging aggressive bets using these alternative methods.

And their number is growing. Research firm Morningstar counted 1,282 mainland-focused funds as of the end of November. According to the China Trustee Association, private Chinese funds managed a total of 203.96 billion yuan as of the end of September. Their returns so far this year have averaged 15% as of the end of November, in a broader market that was little-changed in the same period, and almost 10% a year over the past five years.

Industry tracker Eurekahedge puts returns of hedge funds invested in mainland-listed stocks at 23% as of the end of November, beating 14% for Asia-focused funds in the same period. Strong economic growth, an undervalued domestic market and fund managers willing to take bold risks are key to why funds here outperformed, said analyst Mohammad Hassan.

China has rolled out several new financial products recently, suggesting that funds will increasingly have more options for hedging their trades. Government bond futures were reintroduced in September after 18 years and iron-ore futures were launched in October.

Fund managers expect the country’s first options products to be offered as early as next year, given that Shanghai-based China Financial Futures Exchange, one of the country’s four futures exchanges, started simulated trading of equity-index options this November.

Cougar Asset Management Co., one of Shanghai’s first quantitative funds, currently hedges its stock positions on the mainland by shorting products trading in Hong Kong, including related stocks and ETFs comprised of mainland shares, according to co-founder Bill Guo.

Despite added restrictions because Cougar is a foreign fund, Mr. Guo said he believes there will be more opportunities on the mainland in coming years. The team plans to adapt its trading model to new products, including single-stock options, which he says would likely become available first to local hedge funds.

The fund has under US$100 million invested in stocks of roughly 100 companies on the mainland, Hong Kong and the U.S. markets, and is up double digits this year.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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