Meet China's Hedge Fund Capital
China has often found itself in trouble over the past couple of decades for its attempts to replicate technology from other developed countries. But technological advances aren’t the only things being mimicked in China as the country is also littered with fake replicas of monuments from around the world including the Great Sphinx of Giza, the Sydney Opera House and the U.S. Capitol building, just to name a few.
Now, in an effort to replicate the United States’ bustling hedge fund industry, China has apparently also decided to knock off Greenwich, CT. Appropriately named Yuhuang Shannan Fund Town, more than 1,000 hedge funds and private equity funds, overseeing a combined 580 billion yuan ($84 billion), have registered in the village since its official re-branding in May?2015. And, with subsidies amounting to 30% of a typical firm’s tax bill adding to the area’s appeal, it’s no wonder that Yuhuang Shannan now boasts one of China’s largest hedge fund clusters outside the mega-cities of Shanghai, Beijing, and Shenzhen…hedgies do love their tax havens. Per Bloomberg:
Nestled between the Qiantang River and Jade Emperor Hill, the village of Yuhuang Shannan feels a world removed from the surrounding metropolis of Hangzhou. The city of 9 million is hectic and loud, while this gated community—on the same site where emperors in the Song dynasty prayed for good harvests centuries ago—is quiet and green, exuding the feeling of a laid-back, high-end oasis.
Almost non-existent just a couple of years ago, China’s hedge fund industry has blossomed recently with the total number of hedge funds almost doubled in 2016, and assets under management that have more than tripled over the past two years.
In part, the Chinese hedge fund industry is booming thanks to cautious support from securities regulators and the gradual liberalization of local equity and bond markets. Despite some scandals—including a high-profile market manipulation conviction—policymakers are starting to view hedge funds as worthwhile contributors to Asia’s largest economy.
As Bloomberg notes, “fund towns”, like Yuhuang Shannan, are attracting alumni from some the largest U.S. banks and hedge funds from Goldman Sachs to Bridgewater.
Alumni of Goldman Sachs and Bank of America Merrill Lynch have moved in, while a representative of Connecticut-based Bridgewater Associates, the world’s largest hedge fund firm, is said to have made a recent visit. “The natural environment is fantastic, and I believe the cluster effect will become stronger and stronger,” says Ted Wang, a former co-head of equities trading for the Americas at Goldman Sachs who now runs Puissance Capital Management, a global investment firm with offices in New York and China. Wang has registered two of his Chinese equity funds in Yuhuang Shannan.
In many ways, the evolution of Yuhuang Shannan mirrors that of the entire country. The area was used mostly for farmland until the 20th?century, when industrialization brought factories and warehouses. About a decade ago the local government made a big push into services, promoting the area first as a tourism zone and then as a design hub. Neither of those efforts was successful, but when hedge funds began moving in and authorities heard about Greenwich, the idea for a fund managers’ village took root.
Today, Yuhuang Shannan is one of the most prominent examples of what policymakers call “characteristic small towns.” The village hosts about 3,000?employees of funds and related businesses, a figure local officials predict will climb as new residential and office space comes online.
Of course, for economic planners keen to reduce the nation’s reliance on infrastructure spending and heavy manufacturing, there’s a lot to like about hedge funds…after all, you can’t just keep constructing buildings then knocking them down and rebuilding them to engineer economic growth…better to pursue that strategy with financial markets instead.
Unfortunately for China’s newest financial wizards, in addition to replicating Greenwich architecture, the hedge fund managers also managed to replicate the negative 2016 fund returns of American’s largest “2 & 20” billionaires.
While Chinese hedge funds lost money on average last year, they avoided a client backlash by outperforming local equity and credit markets. Funds tracked by Shanghai Suntime Information Technology were down 2.5 percent in 2016, vs. a 12 percent slide in the Shanghai Composite Index and a 10 percent retreat in high-yield corporate bonds. Client inflows fueled a 55?percent jump in industry assets, while the number of registered funds rose to a record 27,015, according to the Asset Management Association of China.
Charlie Wang, who ran Bank of America’s global equity quant group in London before leaving to start his own investment firm in 2015, launched two funds in China last year. He says the country’s markets have entered something of a sweet spot; while they’ve grown more sophisticated, adding new tools such as futures and options, they’re still inefficient enough to produce attractive returns for savvy managers. That’s thanks in part to the outsize impact of individual investors, who drive more than 80 percent of volume in the Chinese stock market, vs. about 15 ?percent in the U.S.
“It’s easier to achieve alpha here,” says Wang, 53, who oversees about 350 million yuan as the chairman of MD Grand Investments. He opened a commodity futures fund in Yuhuang Shannan last March and added an equity fund in July, connecting with some of his early clients through the village’s management committee.
This should end well…