Call for clampdown on China hedge funds

Inconsistency in the reporting of performance metrics among China’s rapidly developing industry of private, unregulated funds is being flagged as a major problem that urgently needs to be solved.

Some people are calling for private fund companies, often referred to locally as 'hedge funds', to be better regulated and for an industry standard to be established for disclosing data to enable investors to make more informed choices.

Private fund companies are not allowed to promote products to the general public and as such do not come under the remit of the China Securities Regulatory Commission (CSRC).

Inevitably word of mouth has become a universal marketing tool. Besides press reports, investors often base their decisions on industry rankings published by financial media and third-party distributors of private products.

But these too are regarded as unreliable sources of information, and widespread manipulation of the figures is suspected in some cases.

“There is an absence of an industry standard in terms of filing of NAV [net asset value], calculation of yield and valuation of performance,” says Zhang Zibing, chief operations officer at Shanghai-based data provider Suntime Corporation.

“And worse, there are sometimes significant errors, which could negatively impact investors when they are making their judgments and investment decisions.” 

Zhang says that differences in disclosure dates and calculation methodology for the NAVs of products can render comparisons of fund manager performance ineffective.

Since 2005, private fund companies in China have sold products via trust companies under legislation governing trusts.

Trust companies come under the remit of the China Banking Regulatory Commission (CBRC), which introduced new rules in February last year requiring weekly disclosure of the NAV of trust products investing in securities.

While this was a welcome development, products launched before that date are not subject to this rule. It means that trust companies determine their own schedule of information disclosure for these older products, either on a weekly, monthly or quarterly basis.

Zhongrong International Trust, for instance, disclosed the NAVs of three fund products – Ding Hui No1, Chaos No2, and Ze Xi No3 – on October 27, November 1 and November 12, respectively.

Jerry Li, fund manager of Capital Synergy Investment Management, points out: “If the market experiences a sudden surge or a deep correction, the performance and ranking of funds can be distorted greatly due to the time difference in information disclosure.”

Some firms choose not to indicate dates when disclosing NAVs, while Zhang estimates that the results of around 10% of trust products are not even reported.

While private banks often do their own due diligence of private funds to obtain more reliable and accurate information, this is only accessible to their clients, not the general public.

There is also a distinct lack of confidence and consistency surrounding publicly available rankings tables, given that there are widespread differences in the rankings of the same firms.

The general manager of one private fund company in China suggests that selecting NAVs disclosed on different dates can be used by third-party distributors as a way to manipulate the rankings in order to push the product of a particular company.

Li also notes that third-party distributors sometimes have a bias towards different private fund firms.

“You may notice, if the founder [of the distributor] comes from a mutual fund background, he tends to give a higher ranking to private fund managers who also used to work for mutual funds. Shenzhen distributors give more credits to funds registered in the south of China.”

Another problem that has been flagged is the variety of methods employed to calculate NAV.

As investment advisers, private fund companies typically charge a 20% performance fee. However, while some trust companies disclose NAV net of fees, some report it prior to fee collection, and some with performance fees partially deducted.

Zhang suggests that the difference in fund yields can be as high as 30%, causing even greater confusion among investors.

By the end of last month, 428 private fund investment companies had issued 1,395 fund products via 41 trust companies, among which 1,085 products are still active, finds Suntime Corporation data.