Hedge funds get windfall from runaway stock rally in China

Investors follow financial information at a securities brokerage in Shanghai. China’s equity markets have been on a tear on anticipation of further government stimulus as the country’s economy expands at the slowest annual rate since 1990.Bloomberg/Hong KongChina’s runaway stock rally delivered a windfall for hedge funds focused on the world’s second-largest economy in April.Greenwoods Asset Management’s $1.8bn Golden China Fund returned an estimated 18% during the month, while Rays Capital Partners’ $192mn Asian Equity Special Opportunities Portfolio was up almost 19%. The Zeal China Fund ended the month 12.5% higher. Sumeru Capital Fund, which has less than $50mn of assets, returned 20%.China’s equity markets have been on a tear on anticipation of further government stimulus as the country’s economy expands at the slowest annual rate since 1990. The Shanghai Composite Index surged 19% last month and the Hang Seng China Enterprises Index advanced 17%, among the five top- performing primary equity indexes globally, according to data compiled by Bloomberg.“The outperformance is quite widespread given the uptick in large blue chips and index plays,” said Marlon Sanchez, head of Asia-Pacific prime finance distribution at Deutsche Bank. “Funds that did well were generally long asset plays which moved higher on speculation of more policy reforms in the second quarter.”The Chinese central bank announced the most aggressive cut in lenders’ reserve requirement since the global financial crisis in April. Effective Monday, the People’s Bank of China cut interest rates for a third time since November.The HFRI China Index, which tracks hedge funds focused on the country, jumped 13% in April, the largest monthly gain since Chicago-based Hedge Fund Research started the gauge in 2008.The April profits extended the Greenwoods Golden China Fund’s return this year to 23%, said Joseph Zeng, a Hong Kong-based partner. Sumeru’s record month led to a 26% gain for the first four months, said Ernest Ng, who co-manages the Hong Kong-based fund that focuses on Greater China stocks.Zeal China Fund was up just shy of 20% this year, according to Franco Ngan, chief executive officer of Hong Kong- based Zeal Asset Management which oversees about $500mn assets.The Rays fund returned an estimated 24% over four months, said David Ruan, one of its managers.The Zeal China Fund was helped by increases in materials, insurance and banking stocks that it held going into April, according to Ngan. The market rally accelerated price gains of technology, financial and utilities companies – such as power and water treatment plants – that Sumeru owned and thought would remain undervalued for longer, said Ng. Rays profited from healthcare and environment-related bets, said Ruan.The Shanghai stock index has more than doubled in the past year through May 8, and the Hong Kong gauge rose 44%, raising concern that the rallies are overdone.Quarterly earnings of companies on the Shanghai index are trailing analyst estimates, with the widest gaps in technology and basic materials, according to Bloomberg-compiled data. Shanghai stocks retreated 5.3% last week and the Hang Seng China Enterprises Index was 4.7% off this year’s peak on April 27.“Portfolios are seeing rotation as less confident investors take profits here and potentially stay sidelined until we have more clarity on the direction of policy,” said Sanchez.Share-price surges have not been supported by company fundamentals in pockets of the markets over the last few months, forcing investors to be more selective, Ruan said.The fund managers and Deutsche Bank’s Sanchez also note global funds are still underweight China.