AsianInvestor recently carried out a project to identify the top 10 portfolio managers in China, those with star quality and a sprinkling of magic. You can find our rationale for this venture by clicking here.

We based our choices on a weighted set of criteria: long-term track record, market experience and applicability of strategy for a changing China. What unites them is an ability to find value, typically in sectors that will drive China’s future growth. They all have strong convictions and an ability to make good decisions.

Our list comprises three managers of public mutual funds and seven on the private markets side.

Many private markets managers started life in the public arena, building a good track record before looking for greater investment flexibility and a better profit-share from higher management fees.

They argue the less onerous compliance requirements that come with working on the private markets side gives them greater flexibility to execute. Many target undervalued stocks whose share prices stand to be driven by company restructures or turnarounds.

Private sunshine funds – China’s equivalent of hedge funds – have seen assets under management surge 161% this year to June to Rmb1.28 trillion ($201.5 billion).

Market-neutral strategies have enjoyed a boost in perception given the recent equity market swings, although few private securities managers engage hedging tools beyond index futures.

Managers are allowed to borrow and short-sell a select range of stocks, but are generally deterred by limited availability, regulatory scrutiny and cost.

Nevertheless, these managers merit recognition for seeking to develop more sophisticated strategies in a market with limited hedging tools.

Here we profile the seventh and final private markets manager to make our list, Zhang Lei of Hillhouse Capital.

Zhang Lei

Zhang Lei, founder, chairman, portfolio manager, Hillhouse Capital
With total assets of $18 billion as at end-2014, Zhang Lei is one of the most influential Chinese fund managers to global institutions, and perhaps China’s most experienced investor in emerging domestic companies.

A graduate of Yale University and a former intern at Yale’s Endowment fund, Zhang set up Hillhouse Capital in 2005 to specialise in investing in new companies. Yale University immediately seeded him with $20 million.

Zhang described his investment philosophy as Swensenism – a combination of Yale Endowment CIO David Swensen’s unconventionalism and Chinese Buddhism.

He takes a long-term, value-investing approach to public and private opportunities in primary and secondary markets. He was among the earliest to invest in Hong Kong-listed Tencent, whose market cap has soared over the past decade from $2 billion to $187 billion. Other than tech, he also invests in consumer brands and health care.

Hillhouse now runs offices in Beijing, Hong Kong and Singapore and manages mandates from global institutions including Yale and MIT endowments, sovereign wealth funds, pension funds and family offices. Institutional clients report that Hillhouse’s flagship fund has generated an average 31% annualised since 2006.

“The most successful managers in China who have expanded to set up offshore funds and attract overseas investors are those that have built their businesses on a US hedge fund framework,” Zhang said.

Hillhouse is setting up a mutual fund firm in partnership with Tencent, with the application sent in early July and pending approval by the China Securities Regulatory Commission. The process typically takes six months.