There is a long line of Chinese hedge fund managers planning to set up shop in Hong Kong, many of which are not expected to achieve the necessary scale to sustain their business beyond three years, as reported. If they are to do so, will probably need institutional capital, which tends to look for a proven track record in team building and operational stability – not just decent returns.

AsianInvestor spoke to industry veterans about which firms have gained strong traction and why.

Trust is key. Hedge fund managers point to Hillhouse Capital and Springs Capital as being among the most successful offshore Chinese players. According to research firm Preqin, Hillhouse's AUM stood at $17.8 billion on March 31. AsianInvestor could not ascertain an accurate figure for Springs Capital. 

Hillhouse did not respond to requests for comment, and Springs declined to comment.

Both began as private equity firms and are thought to have most of their assets in such investments. Those PE roots have helped them build credibility with institutions, a Hong Kong-based fund industry executive told AsianInvestor.

But few pure-play hedge funds can emulate this PE-led route to gaining institutional support. Few have the skills to conduct private equity investing, and it takes years to establish a track record of success in that space that can be transferred to hedge fund investing, said the unnamed executive.

Hence Hong Kong-based Pureheart Capital may be a more realistic role model. Zhao Danyang, the firm’s founder, launched his first offshore hedge strategy in January 2003, the Pure Heart China Growth Investment Fund (renamed as Pure Heart Value Investment Fund in December 2009). The fund had HK$2.3 billion ($292 million) in AUM as of July 29, and has posted a total return of 1,382% since inception.

Pureheart launched its second offshore product, Pure Heart Natural Selection Fund, in March 2009. It stood at $115 million as of July 29 and has posted 149% in aggregate return since inception.

Pureheart started with only high-net-worth individuals (HNWIs) as investors, but now also has institutional clients, but declined to reveal how much they account for of its AUM. A spokeswoman for the firm told AsianInvestor that most foreign institutional investors found Pureheart through their own research – typically via performance rankings from data providers – and contacted the firm for further information.

In addition to a proven track record, institutional clients value governance, transparency, risk management system and alignment of interest between investment staff and clients, said Wang Qi, chief executive of MegaTrust Investment (HK). Yet most Chinese fund managers are unaware of the importance of such operational issues, he added.

Meanwhile, mainland hedge fund managers should apparently avoid getting too big. The successful ones generally have between $300 million and $1 billion in AUM, said William Ma, chief investment officer for the Hong Kong arm of Shanghai-based wealth manager Noah Holdings. If they are too big, he noted, performance is likely to suffer, as they are forced to invest in large-cap stocks and thus certain sectors, thereby becoming more conservative.