Hedge-fund-type strategies, such as beta-hedged, market-neutral fund products, are set to attract strong interest from China, says Gilbert Tse, executive vice general manager at Fortune SG Fund Management in Shanghai.
Mainland-based investors are increasingly chasing higher yields than they can obtain from traditional long-only equity and fixed-income funds, he adds, and long/short products are one way to get them.
The Sino-French joint venture between Baosteel Group and Lyxor Asset Management (part of Société Générale) is building up infrastructure to prepare for the launch of more hedge-fund-like products that use long/short strategies on individual stocks listed in China. Tse notes pair-trading strategy as one example.
The required trading and risk management system might take up to six months to develop, adds Tse, who before joining Fortune SG was China head of global markets at Société Générale in Hong Kong.
Thanks to increasingly liberalised domestic regulation for segregated-account fund products in recent years, Chinese investors now have a wider choice of investments based on more complex strategies that are capable of producing hedge-fund-like returns, he says.
For example, in the third quarter of 2011 Fortune SG launched a market-neutral product based on quantitative investment strategy. Rather than employing traditional stock-picking, it creates a beta-neutral, enhanced index investment portfolio referencing the CSI 300 that is rebalanced monthly.
The index is “enhanced” because the portfolio does not fully replicate industry weightings of the CSI 300. The product takes a long/short approach because it is long the enhanced index investment portfolio and simultaneously short CSI 300 stock index futures.
“Up to mid-February, the fund has yielded a return of about 2.5%,” says Tse, which equates to an annualised return of about 6-7% with an annualised volatility of about 4%. By contrast, he notes, many long-only products in the Chinese equity markets lost money during the same period.
The total size of the fund is about Rmb100 million. It is distributed to privately placed segregated-account distribution channels, which see major commercial banks in China acting as distributors and are marketing the product with a minimum investment of Rmb1 million. In China, funds marketed as segregated-account products can be sold to a maximum of 200 investors.
“We believe that our initial success in this segregated-account product has prepared us well for more product innovation, particularly those that are based on quantitative strategy,” says Tse, citing Lyxor's derivatives and quantitative capabilities.
Chinese regulators permitted short-selling on individual stocks based on the 50 constituents of the SSE 50 Index trading on the Shanghai bourse and the 40 constituents of the SZSE Component Index on the Shenzhen bourse as part of a pilot scheme started in March 2010. Domestic securities firms now operate margin-trading businesses enabling individual investors to either buy or short stocks on margin accounts.
Market participants anticipate that an expected centralised securities-financing company will ultimately deepen China’s short-selling market volume. The organisation will reportedly be set up in Shanghai by the Shanghai Securities Exchange, Shenzhen Stock Exchange and their equally owned clearer/depository, the China Securities Depository and Clearing Corp (China Clear).
Separately, market participants like Tse hope that soon foreign investors will be able to use their offshore renminbi to invest into these onshore products – potentially through the renminbi qualified foreign institutional investor (RQFII) scheme, which last week had its quota expanded to Rmb50 billion from Rmb20 billion.
Moreover, Tse says he hopes that Chinese and Hong Kong authorities will further expand the scheme – by allowing more flexibility in the mix of asset classes permitted under the first batch of RQFII. When RQFII was first launched last year, Chinese asset managers were restricted to investing 80% of their proceeds in bonds, with the remaining 20% in equities.