China still turns the heads of global hedge funds

Trade war tensions aside, foreign hedge funds retain strong interest in the Chinese market, and, conversely, Chinese hedge fund managers seek to expand business overseas

Despite trade tensions with the US and the market volatility, China is still one of the themes among foreign hedge funds. Other markets such as Hong Kong, Singapore and Japan are also gaining traction from hedge fund advisors such as Sussex Partners.

"Greater China is definitely one of our main areas of focus," says Patrick Ghali, managing partner at Sussex Partners. In terms of the impact of the volatility of the Chinese A-share market and Sino-US trade tensions, Ghali says that he has not seen too much wavering from their clients. "Western investors who are tracking Asia and China still see the macro trend," says Ghali. In this fluctuant market, he suggests investors keep an eye on the long term.

Overseas fund managers doing hedge fund business in China need to register under the private equity fund category in the Asset Management Association of China. So far, 14 overseas hedge fund managers have registered and the world's largest hedge fund manager, Bridgewater, last month rolled out its first private equity fund in China.

One thing is certain: Chinese equities are getting more traction from global investors. "By the end of the next decade, 2028 or so, Chinese equities could be a core asset class in everyone's portfolio, in exactly the same way as US equities are a core asset class in every global investor's portfolio," says Yves Bonzon, chief investment officer and head investment management at Julius Baer.

Whether this pans out is down to the decisions made by the Chinese leadership, according to Bonzon. "Is the Chinese leadership still committed to a market-based economy and private entrepreneurship, or is there a push back against private entrepreneurship, back towards a more state-controlled, state-funded and central-guided economic model? That, to me, is the key as to whether or not China will rise to core asset class factors," says Bonzon.

Looking from a different perspective, Chinese fund managers are actively expanding hedge fund business overseas. "These days many Chinese investors want increased exposure across the globe," says Ghali. Despite this demand, Chinese fund managers, especially the small to micro ones, are having a hard time investing overseas.

One of their pain points investing overseas lies in the lack of a good track record regarding their performance, which leads to discrimination when opening accounts and trading overseas, according to a Chinese hedge fund manager. Ghali suggests the Chinese fund managers enhance their research capability.

Having been tracking Asia ever since Sussex Partners was first established in 2004, Ghali also favours other Asian markets besides mainland China, such as Hong Kong, Singapore, and Japan.

"Japan is quite an interesting market," says Ghali. Many Japanese fund managers are more diversified than their western counterparties, according to Ghali. In addition, the assets of Japanese hedge funds represent a relatively low proportion of the total market capitalization, which indicates potential investment opportunities.

South East Asia is not very attractive in terms of liquidity, according to Ghali. "We have also been watching India but have yet to find a fund manager we like," he adds, noting that South Korea and Taiwan are not gaining much traction due to tax issues.