Market Chaos Makes China-Focused Hedge Funds Winners in 2015

In a brutal year for high-profile hedge fund managers like Bill Ackman and David Einhorn, less-famous stock pickers focused on China stood out for their stellar performance.

China-focused managers betting on rising and falling stocks returned 11 percent in 2015, outpacing both the Shanghai Composite Index and the gauge of Hong Kong-listed stocks by a wide margin, while U.S. funds narrowly beat benchmarks and European ones trailed, according to Eurekahedge Pte. Stars included Hao Capital Management, with offices in Hong Kong and Shanghai, whose $268 million hedge fund surged 135 percent through November.

To justify their fees, hedge fund managers have to deliver alpha -- outperformance relative to benchmarks -- even in a market that’s slammed several high-profile funds. Unlike peers in the U.S. and Europe, hedge funds investing in China have been able to exploit a market that has a wider dispersion between the best- and worst-performing stocks. And despite lurching from one extreme to another, nine out of 10 stocks in the Shanghai Composite rose in 2015, helping managers sidestep big losses. This year will provide another test of managers’ ability to handle volatility, with at least two China-focused funds posting large declines during a tumultuous start to 2016.

“China’s stock market is much less efficiently priced,” said Grace Lu, who manages the GH China Century Fund in Singapore. “If you are a good stock picker, it gives you more opportunities on the stock picking side compared to Europe and North America,” said Lu, whose fund advanced 18 percent last year.

Outsize Impact

Large differences between the top and bottom returns of individual shares in China means that good stock-picking can have an outsize impact. The median return of the top decile of the 1,112 companies traded in Shanghai was 150 percent in 2015, while the median for the bottom decile was a decline of 35 percent, according to data compiled by Bloomberg. That compares with a 39 percent median return for the corresponding top group in the Standard & Poor’s 500 Index, and a median drop of 43 percent.

For many U.S. managers, 2015 was a bad year. Einhorn’s Greenlight Capital hedge fund, based in New York, dropped 20 percent in 2015, only the second losing year in its almost 20-year history. Ackman’s Pershing Square Holdings Ltd. slumped 20.5 percent in 2015, while funds run by Fortress Investment Group LLC and BlackRock Inc. were among those that closed down.

Last year, China-focused hedge funds that cater to international investors including those run by Greenwoods Asset Management and Springs Capital were helped by well-timed trades including purchases of yuan-denominated A shares. The Shanghai Composite Index surged 60 percent in the first part of the year through June 12, only to plunge 43 percent between June and August before rebounding again through year-end.

Rough Start

Market volatility is working against some hedge funds investing in China this year, amid a rough start for the nation’s stock market. The Shanghai Composite Index is down almost 15 percent so far in 2016, making it the worst-performing primary stock gauge tracked by Bloomberg. Fears of a slowdown in China have rippled across the world, with a selloff wiping out more than $5 trillion from global equity values this year.

The $2 billion Greenwoods Golden China Fund returned 22 percent for 2015, with the fund making more money in the first half, said Joseph Zeng, a Hong Kong-based partner at Greenwoods. This year, the fund declined 4.6 percent through Jan. 8, according to an e-mail to investors.

Many managers, including the GH China Century Fund in Singapore, posted gains in 2015 after selling China shares to lock in gains before they collapsed mid-year, and snapped them up again before they rebounded in August. 

“We closed all our A share positions in May,” said GH China’s Lu. “We felt that valuations became overstretched.”

Springs, APS

Springs China Opportunities Fund gained 29 percent for the full year, according to an update sent to investors. Springs oversaw about $5.5 billion in funds targeting Chinese and international investors by November. Class A shares contributed the bulk of last year’s performance for Springs China Opportunities Fund, said Jenny Tian, a Hong Kong-based managing partner. This year, the fund slumped 9.8 percent through Jan. 8, according to a separate investor update.

APS Asset Management Pte’s Greater China Long/Short Fund rose 42 percent last year. The firm was helped by stock bets including Beijing Venustech Inc., an information-security products company that more than doubled last year, the Singapore-based money manager said last month.

ADRs Surge

Managers also benefited last year from smartly timed bets on American depositary receipts of Chinese companies in the latter part of the year. The Bank of New York Mellon China ADR Price Index, which tracks China and Hong Kong companies listed on the New York Stock Exchange and the Nasdaq, jumped 16 percent in the last three months of the year after plunging more than 30 percent from a peak in April.

SPQ Asia Capital Ltd., whose more than $300 million fund had a more than 30 percent estimated gain in 2015, bought some of its ADRs as early as 2014 as core holdings that it expected to keep for about a year because of attractive growth prospects and valuations, said a person with knowledge of the matter who asked not to be identified because the information is private. The fund added to some of those holdings during the ADR selloff, before they rebounded when sentiment improved by mid-September, the person said. Gregoire Dechy, chief operating officer of Hong Kong-based SPQ, declined to comment.

Some funds profited from the swings in ADR prices of Chinese technology companies including Alibaba Group Holding Ltd., Baidu Inc., Qihoo 360 Technology Co. and Ctrip.com International Ltd. Baidu, the Chinese Internet search company, saw its ADRs plummet 42 percent to last year’s low in September, only to surge 43 percent by the end of December amid industry consolidation and a better-than-expected profit. Alibaba’s ADRs dropped nearly 45 percent to a September low last year ahead of a 42 percent rebound.