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Will China Present Hedge Fund Opportunities Amidst New Reform? – June 2014

by Selina Sy

  • 25 Jun 2014
  • HF

The recent news of the China Construction Bank (CCB) being appointed in London as the first clearing bank for the renminbi outside Asia has signified a milestone in the country’s progress to develop their economic powers on the world stage. Indeed, the initiative to open up China’s currency borders to the world is part of wider plans to reform the financial system of the country as the population continues to enjoy significant economic growth. Hedge funds targeting this region will be keen to see how this air of reform will affect the industry in years to come as capital is moved in and out of the country more freely. Here we look at how hedge funds investing in China have fared recently and over the longer term, and to what extent investors should keep an eye out for lucrative investment opportunities in this region.

Data from Preqin’s Hedge Fund Analyst shows that funds with a focus on China saw considerable outperformance in 2012 and 2013, returning 19.55% between May 2012 and May 2013, compared to 13.31% reported by all hedge funds in the same period, proving that this region has the potential to provide investors with excellent investment opportunities. However, this has not been the case in recent months as these funds posted a loss of 2.39% between the start of 2014 and the end of May. This compares unfavourably to the Preqin Emerging Markets - Asia benchmark (which is up 4.64% year-to-date), indicating that hedge funds with exposure to China have not been able to capture the same upward trajectory this year as funds targeting emerging markets throughout the region.

Over the longer term, the performance of these funds has demonstrated comparatively high levels of risk as volatility remains higher than the industry average (9.4% compared to the hedge fund benchmark of 5.2% over the past three years). Funds targeting China have also seen lower annualized returns of 3.85% over the last three years compared to 6.38% for all hedge funds for the same period.

While past performance of these funds can be disconcerting to the more risk-averse investor, trade and transparency reforms are helping to reshape China’s investment environment. Industry observers will be interested to see what opportunities the new financial and economic regime has for the China region and what exciting prospects they can bring to the industry in the coming decades. Preqin’s Hedge Fund Investor Profiles online service shows that there are already 70 active institutional investors taking an interest in hedge funds providing exposure to the Greater China region, no doubt keen to capitalize on prospective development in the geographic area against the backdrop of China’s economic restructuring.

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