Start A Hedge Fund – In China!
China-specific hedge funds have existed for many years, but until now they have all operated outside of China. Now, in a potentially landmark event, E Fund Management Co. – China’s second largest asset management company – is about to start a hedge fund in China. E Fund, which has $29 billion under management, will be allowed to raise capital from high-net-worth investors in separate managed accounts and use the same investment strategies as hedge funds.
“This is opening up a new market seeking absolute returns, which could be quite attractive in a market that’s been volatile,” said Dong Yiting, a senior analyst at Guosen Securities Co.
The nation with the world’s fourth-largest number of millionaires has expanded money-management products to meet growing demand. Regulators introduced index futures and short selling in April, enabling investors to bet on falling as well as rising prices, to ease fluctuations after the Shanghai Composite Index jumped 80 percent in 2009 before slumping.
The number of dollar millionaires in China soared 31 percent to 477,400 in 2009, according to a report in June by Capgemini SA and Merrill Lynch & Co. The number of millionaires in India and China is expected to triple in the decade to 2018, the report said.
“Separately managed accounts at asset management companies now are in the position to operate in the way hedge funds in developed markets do with the same strategies at their disposal,” said Liu Zhen, a managing director in the index and quantitative investment department of E Fund who helps oversees the product.
The fund manager will charge “2-20 like” fees, said Liu, a former U.S.-based money manager at Brevan Howard and D.E. Shaw. Hedge-fund fees are typically 2 percent of the assets overseen and 20 percent of the profits made. Liu declined to give details of the breakdown in fees.
Currently, funds in China can use only limited leverage because brokerage firms there don’t provide the kind of one-stop service as prime brokers in the U.S., the funds need to put up more cash as collateral, and there are less securities available to borrow, said Zack Liu, head of quantitative investment at China Southern Fund Management.
Liu said China Southern is working on setting up a similar hedge fund and plans to raise money from wealthy individuals. China Southern had 180 billion yuan under management as of the end of March.
Some privately raised funds in China have been using stock- index futures to manage risk. The four contracts, agreements to buy or sell the CSI 300 Index at a preset value on an agreed date, are designed to allow investors to bet on and profit from both gains and declines in the market. The index tracks the 300 biggest stocks on the Shanghai and Shenzhen exchanges.
The CSI 300 closed 0.7 percent lower at 3 p.m. local time, while the benchmark Shanghai Composite fell 0.6 percent.
The securities regulator in July said it would allow separately managed accounts at asset management companies to trade stock index futures based on clients’ needs. The CSRC won’t regulate the investment purposes, proportion and information disclosure of the accounts targeted at wealthy individuals.
Details of the fund have been submitted to China Securities Regulatory Commission for registration, according to a company statement yesterday.
The fund will “seek to hedge market risk through stock index futures and other tools” and will “maximize returns of each unit of risk,” E Fund said in the statement.
E Fund had 200 billion yuan in assets under management by the end of March, according to its website.
Bank of China Ltd. will be the trustee for the product.
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