China warms to CTAs, but foreigners remain wary

Mainland regulators have signaled their eagerness to have overseas participation in onshore CTA funds, but regulations still need to be defined.
China warms to CTAs, but foreigners remain wary


China is being eyed keenly by foreign commodities trading advisers (CTAs) as a market with huge potential for generating returns, but the lack of defined regulations remains a barrier, say industry executives.

“Every year I’m seeing more [foreign] CTAs coming to China and looking for access,” says Stephen Michael, principal of Stonehenge Asset Management, during a panel discussion at FOW Derivatives World Asia in a Hong Kong conference yesterday.  

“It’s more exploratory, but [they’re] certainly looking for entry to China. And of course, we’re one of them,” says Michael, whose US-based firm runs multi-strategy hedge funds that focus on global futures and forex markets.

The attractiveness of the mainland market is attributable to factors that include its liquidity, high trading volumes and diversification from overseas markets, which boil down to a perceived potential to generate high returns.

Mainland regulators, meanwhile, have signalled their interest in further developing the onshore CTA market to include foreign firms.

In November last year, the China Securities Regulatory Commission (CSRC) granted its first batch of 18 asset management licences to mainland futures companies. Some of them are now looking to partner foreign CTA managers to invest mainland capital into onshore futures markets, according to Z-Ben Advisors.  

China’s retail investors account for 80% of the capital invested in onshore CTAs, says panelist Lisa Xu, president of White Eagle Management, a US firm that offers a futures and financial training programme to Chinese financial institutions.

“That is a very large percentage. So the CSRC currently encourages [futures commission merchants] to serve the needs of institutional customers” by granting them asset management licences, she notes.

From the view of overseas hedge funds, CTAs would seemingly be the easiest strategy to import from the West, according to panelist Martin Aiken, a senior adviser at Efficient Capital Management, a US-based multi-manager CTA fund.

“You can’t do long/short [as] it’d be prohibitively expensive [or] distressed because you can’t price credit in China,” notes Aiken. Event-driven was also not possible “because events are staged; they’re not market clearing events. [But] you can take Western systematic CTA strategies and pick them up and drop them down in Chinese capital markets.”

Winton Capital last year partnered with Shanghai-based Fortune SG Fund Management for a CTA fund that puts the UK firm in a research advisory role.

Meanwhile, large overseas CTAs are said to be back-testing their algorithms in advance of an eventual mainland China launch.

Yet many barriers remain for overseas managers who want to set up onshore funds. Perhaps the biggest obstacle is the lack of a defined, permissible fund structure in which foreign CTA managers can run an onshore strategy.

Mainland futures firms that are seeking overseas partners are considering the establishment of a platform that would operate as joint advisory mandate on special accounts, with a split of fees between the two, according to Z-Ben.

However, there is no existing regulation to govern such platforms for onshore accounts. “Our concern is the lack of clear regulation," says Michael.

"China is going to have to, over time, develop a clear set of regulatory rules ...  and make them conducive to bring in outside managers. A lot of CTAs in the US are not interested in working in a grey environment. They need a black and white environment.”

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