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Shanghai-Hong Kong Stock Connect Sees Chinese Markets and Equity Strategies Outperform - May 2015

by Christopher Beales

  • 22 May 2015
  • HF

The recent outperformance of China-focused equities strategies hedge funds is showcased in the chart below, using data from Preqin’s Hedge Fund Analyst online service. April 2015 saw Preqin’s benchmark for these funds generate 11.45% for the month, building on the 3.96% return in March and driving the 12-month cumulative return figure to 32.33%. This compares favourably to equity strategies hedge funds focusing on other regions, demonstrating that there have been substantial opportunities for gains in China over previous months. In this blog, we take a look at the drivers of this outperformance and what this could mean for hedge fund investments in the region in the future.

Such outperformance can be attributed to the remarkable investment activity in China and Hong Kong over the past year. During this time, the Shanghai Stock Exchange Composite Index has doubled, while the Hang Seng index of Hong Kong hit a seven-year high in April. The investment in China’s market follows the Chinese Government’s ongoing financial reform, most recently seen by the People’s Bank of China cutting interest rates in May, for the third time since November, as well as relaxing trading account rules. However, the most important development in recent months is arguably the newly opened Stock Connect link between Hong Kong and Shanghai, which allows investors to trade in each other’s market and increases the flow of investment across China. As noted in a previous blog, Hong Kong remains the financial hub of hedge fund activity in the Asia-Pacific region, ahead of Singapore and Australia.

Equity strategies hedge funds tracked on Preqin’s Hedge Fund Analyst service have cited Stock Connect and the growth of China’s equity markets as the drivers behind this recent strong performance. For example, Atlantis China Healthcare Fund, managed by Atlantis Investment Management, returned 9.70% and 15.20% for March and April respectively, and maintains that the inflows into the Hong Kong market via the trade link with China was the main driver of its performance in March. The China A Shares stock picks of the Zeal China Fund, managed by Zeal Asset Management, were the main driver behind the April return of 12.42% for investors, as China-based firms trading on Chinese markets saw their share price increase throughout the period.

Over the longer term, it will be interesting to see how economic activity in the region will continue over the months to come, and how this could translate into gains for hedge fund managers taking advantage of China’s growing indexes and the Chinese Government’s ongoing financial market reform. In the meantime, equity strategies hedge funds targeting China have shown strong outperformance over the past few months, principally driven by the buoyancy of Chinese equity markets and significant investment reforms. 

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