FOR INDUS CAPITAL PARTNERS, 2013 COULD BE THE year of the
hedge fund in mainland China. General counsel and partner Brian
Guzman and his colleagues at New York–based private
investment fund adviser Indus, which was spun out of legendary
hedge fund manager George Soros’ firm more than a decade
ago, have been eyeing the Chinese market for some time. With
regulators poised to allow foreign hedge funds to set up shop
in the country’s second-largest city, they’re
optimistic.
Indus, which runs long-short strategies, plans to apply to
the proposed qualified domestic limited partner (QDLP) program
in early 2013. Under QDLP non-Chinese hedge funds would be able
to establish marketing offices in Shanghai and gather assets
from its institutional and high-net-worth investors.
“These are tentative steps to open up to global
investors,” says Guzman, whose firm opened a Hong Kong
office in 2000 and manages $4 billion, roughly half of it
in Greater China equities. “Our hope,” he adds,
“is that regulators look at our industry with rational
sense and see that firms such as ours are low-risk,
low-volatility, long-term investors who add a lot to the
markets in general, but specifically liquidity, efficiency and
price discovery, which can ultimately reduce
volatility.”
The Shanghai Municipal Financial Service Office is expected
to formally launch the QDLP pilot program in the next few
months by granting its first licenses, says Hubert Tse, a
partner at Shanghai-based law firm Boss & Young whose
clients include several managers on the waiting list. The quota
for renminbi to foreign currency conversion hasn’t been
announced, but Tse predicts it will rise after a few
global alternative asset managers win approval and QDLP proves
a success. A handful of firms, including Blackstone Group, Man
Group and Millennium Management, have expressed interest, says
Aradhna Dayal, head of Asia at research firm HedgeFund
Intelligence.
Both sides have something to gain. Local and global hedge
funds have long been active in Hong Kong, but mainland
regulators legalized a domestic industry just two years ago.
The latest careful move toward liberalization, QDLP suggests
that Chinese authorities recognize hedge funds’ value and
are serious about making Shanghai an international financial
center by 2020. For foreign firms the program provides access
to Chinese investors and a beachhead in the second-biggest
equity market after the U.S. If China allowed widespread margin
trading, it could be the world’s largest and most liquid
market in less than a decade, Tse says. “It is not
surprising that global hedge funds are positioning themselves
to tap this opportunity,” he notes.
Unlike the established qualified foreign institutional
investor (QFII) program, QDLP doesn’t permit trading of
mainland Chinese securities such as A and B shares. But it is
another step in the renminbi’s march toward full
convertibility. Through a Shanghai-based entity, foreign hedge
funds can invest the yuan they raise offshore. This is
significant because it exposes Chinese capital to risks that
domestic regulators can’t control, Tse says: “It
sends a positive signal to the global hedge fund managers and
investors that Shanghai is very committed to further financial
and capital market opening and reforms.”
Smaller firms are welcome to seek licenses. In early 2013,
Shanghai authorities will lower the asset threshold for QFII
managers from $5 billion to $500 million and their
minimum track record from five years to just two; the same
rules will apply to QDLP hopefuls.
As a sign of the times, the Asia subsidiary of London-based
futures and hedge fund manager Winton Capital Management has
entered into a research consultancy agreement with Fortune SG
Fund Management in Shanghai, which manages 36 billion yuan
($5.7 billion) and is a joint venture between Lyxor Asset
Management and the Baosteel Group. The two firms will work
closely together in such areas as investment in futures markets
and product development for managed futures mandates in China.
Fortune SG has just launched the first commodity trading
advisor product in China. The fund is denominated in Renminbi,
trading inside China and is available to domestic investors. As
part of the agreement, Winton Capital Asia provides its
research to Fortune SG.
China’s cautious embrace of hedge funds dates to late
2009, when the China Securities Regulatory Commission began
permitting a few asset managers to do margin trading and
short-selling with selected equities. The following year it
allowed Guangzhou-based E Fund Management Co. to launch the
mainland’s first hedge fund; today dozens of them raise
capital from high-net-worth individuals through managed
accounts. “Authorities realize the [important role] that
hedge fund managers play in rooting out those who masquerade as
creditworthy companies,” says Liu Zhen, head of index and
quantitative investments at 180 billion-yuan
($29 billion) E Fund.
As China’s equity markets grow deeper and more complex,
long-only asset managers are turning to global advisers for
risk management programs that use index-linked, quantitative
and alternative strategies, says Olivier d’Assier,
Singapore-based head of Asia at portfolio strategy advisory
firm Axioma. On the hedge fund side, many of New
York–based Axioma’s Chinese clients are
equity-focused, d’Assier explains. “The lack of
flexibility of the regulatory regime for hedge funds in China
will mean that we will be working closely with them on some
very specific sources of alpha,” he says.
As for QDLP, attorney Tse reckons foreign hedge fund
managers will be cautious too. “But if it turns out to
work, then I think subject to cost-and-benefit analysis, more
hedge funds would apply,” he says.