Hedge funds investing in Greater China achieved solid returns through the first five months of the year. According to Preqin’s Hedge Fund Analyst database, from January to May 2015 these funds returned 18.35%, compared to the industry average of 4.86%. However, amid the stock market turmoil of the past two months, funds with a focus on Greater China returned -3.45% and -4.43% respectively in June and July. While this may not seem like the ideal situation in which to seek investment opportunities, institutional investors are looking to hedge funds to protect their capital in this Far East bear market.
The most numerous types of institutional investors that have demonstrated a preference for Greater China-focused hedge funds are fund of hedge funds managers (27% of investors), foundations (22%) and private sector pension funds (19%). Sixty-five percent of institutional hedge fund investors seeking opportunities specifically in Greater China are based in the US.
The average institutional hedge fund investor allocates approximately 15.0% of its assets under management to hedge funds; in contrast, investors with a preference for Greater China-focused funds have a greater allocation of 25.0%. This allocation increase perhaps affords them greater investment sourcing and due diligence abilities to consider the region. These investors have also demonstrated a strong preference for direct single-manager hedge funds, with 65% investing only in direct hedge funds and 32% investing in both direct and fund of hedge funds.
Even with the market uncertainty and negative returns of recent months, Greater China-focused hedge funds may still provide capital-preserving opportunities for institutional investors, as we shall see over the coming months. The year-to-date performance of China-focused funds remains positive at 7.76%, though some investors may be put off by the volatility and uncertainty witnessed of late.