First hedge fund movers in China must adopt long-termist approach

19 Sep, 2013

Hedge funds hoping to raise money in China through the Shanghai regulator’s Qualified Domestic Limited Partner (QDLP) programme will benefit from being the first movers into the space, but must accept they could incur losses for the first few years, it has been said. 

It was revealed last week that six hedge funds – Canyon Partners, Citadel, Man Group, Oaktree, Winton Capital and Och-Ziff – have secured approval from the Shanghai regulator to raise capital on the mainland. The regulator is likely to give these managers an overall quota of $300 million to manage, which will be split six ways.

“This is an exciting first step by China and those hedge funds which take advantage of QDLP are likely to reap rewards down the line. It is essential these managers adopt a long-term approach towards China though if this is to happen,” said Adrian Harrison, director of sales and marketing at HSBC Prime Services in Hong Kong.

There are a number of inhibitors to the development of a hedge fund industry in China. Perhaps the most significant is whether or not the central government actually permits the growth of an alternatives industry, while other fundamental issues include stringent limits on the securities hedge funds can short, as well as capital controls.

Hedge funds hoping to market into China through QLDP can go direct to high net worth individuals (HNWIs), engage third party marketers or enter into distribution agreements with securities companies, fund managers or banks. This will require hedge funds to conduct operational due diligence on their partners, and will certainly not be cheap. While banks are a powerful source of distribution to the mainland’s burgeoning HNWIs, the commissions they charge could eat into hedge funds’ management fees.

China as a whole has been taking steps at regularising its domestic fund management industry, namely the sunshine funds. It was announced in late February that private fund managers or “sunshine funds” running more than RMB 100 million will be required to register with the Asset Management Association of China, a China Securities Commission sponsored self-regulatory body.

 According to data from the China Trustee Association, China has a private trust fund, or sunshine fund asset base totalling RMB 138.3 billion, or roughly $22 billion. Sunshine funds are similar to hedge funds although the majority adopt long-only strategies. A few experts even reckon the registration requirements could be afforded to foreign hedge funds as well in time.  “The regularisation of the private funds was a huge step and it helps these managers obtain legitimacy,” commented Harrison. 

ChinaShanghaiQDLPSunshine fundsHSBCWinton CapitalOch ZiffMan GroupOaktreeCanyon Partners