Shanghai calling

March 20, 2013  

From June, China is to allow sunshine funds to be licensed as proper asset management firms

By Aradhna Dayal

nullOn a recent trip to Shanghai, I was impressed to see a rare combination of change and history – a spirit that also seems to permeate the country’s emerging hedge fund industry.

As beautifully lit skyscrapers compete for attention with the historic Bund, as modern day cars jostle for space with the glorious old rickshaws, and as Hermes scarves flutter about the lovely Cheongsam dresses, China seems ready to go global.

What is striking, however, is the desire that the country and its people have to keep its traditions alive, and adapt them to the international trends.

It is no surprise then, that China’s nascent hedge fund industry is adopting the same progressive yet cautious approach. Starting from June, the new investment fund law comes into force, which will allow the sunshine funds (as the quasi-hedge funds in China are called at present) – many of which function in something of a grey area as of now – to be licensed as proper asset management firms.

This will allow them not only to launch well-regulated funds and raise significant assets, but also to appear to be fully compliant and credible in the eyes of global investors. In short, it will enable them to transform themselves into international-calibre alternative investment shops, while keeping their own history alive.

The other landmark change is taking place on the regulatory front. While index futures are the only tools available right now for hedging, there is a slow but steady move towards allowing individual stock shorting, and towards allowing hedge funds to access that market directly rather than through a limited number of brokers. This, when it happens, will usher in a true hedge fund industry in China.

The new investment fund law might also come as a boon to global hedge fund shops aspiring to step into China. On the condition of anonymity, several industry sources mentioned that foreign hedge fund managers could well be allowed to register as asset managers under the new investment fund law, as the law is unlikely to make a distinction between local and foreign candidates.

The other door that is opening to global hedge fund shops in China is the Qualified Domestic Limited Partners scheme, the pilot programme by the Shanghai government that will allow foreign hedge funds for the first time to raise local renminbi-denominated assets in China. While that programme seems to have been delayed slightly, it is expected to get the green light from Beijing by mid-year or the third quarter.

Of course, not all local sunshine funds are rushing in to be licensed under the new investment fund law, and not all foreign players are clamouring to be the first to get a QDLP license. Patience, as they have learnt from previous experiences in China, is often a virtue.

So the sunshine funds are busy figuring out the new compliance regimes they need to face once get registered, the fee structure they can apply and how they can migrate assets from their existing funds to the new licensed products. Global managers, on the other hand, are doing realistic assessments of the investment and manpower required as well as the quantum of capital that can be raised before putting up their hand for QDLP.

But one thing is certain: the China hedge fund industry is on the cusp of evolving as a global alternative investments powerhouse, and those that invest the time and effort to understand it will have an early bird advantage.

Taking this mantra to heart, AsiaHedge will endeavor to keep pace with the fast-growing China hedge fund market, including profiles of onshore sunshine funds, coverage of changing regulation and special reports on the industry growth. Our story in this issue on Hillhouse Capital’s assets reaching $7.5 billion is an example of this.

Turning our focus to investors, Australia’s superannuation funds are hitting $1.6 trillion in assets and emerging as one of the most sophisticated allocators to hedge funds in recent times. This month we take a look at where they invest and why.

Finally, this issue also brings you the AsiaHedge Asset Survey for 2012. Despite a sea change in investor sentiment towards Asia and generally robust fund performance last year, it shows that the Asia hedge fund industry contracted slightly by 1.1% to end 2012 at $139.08 billion.

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