China's private funds seek offshore support
The increased aggressiveness of China's authorities in cutting false private funds out of the industry should benefit the industry in the long-run. It could also attract more foreign investor interest.
The AUM of the top-20 onshore hedge fund managers represented around 15% of the industry’s Rmb2 trillion in AUM at the end of April, according to Gesafe.
Higher-calibre private fund players are already looking offshore to build contacts and, eventually, assets. Several private fund managers are lining up to gain a type 9 asset management licence from Hong Kong’s Securities Future Commission and then open an office in the territory, as they eye sub-advisory mandates from global institutions (see our regulatory analysis pages in the May issue of AsianInvestor).
Leading mainland hedge funds and private securities firms – such as Springs Capital, Greenwoods, Pegasus Investment and Rosefinch – have already set up Hong Kong divisions.
“Their qualification under China’s regulatory regime will be important,” said Davis Wang, China head of law firm Simmons & Simmons. “If anyone has an interest in [working with] these Chinese private fund managers, they need to pay attention to this information.”
“Onshore private managers would be a source of alpha for global investors who want access to onshore China,” added a Hong Kong-based sales head of a Chinese fund house, noting that unlike onshore mutual funds, “private managers can use flexible strategies”.
He said most star fund managers who outperformed their benchmark index in the past two years had left to set up private fund firms, confident their track records will attract offshore investors. In many cases, they’re right.
For instance, Hong Kong-based CSOP Asset Management launched a China intelligence A-share fund that sub-advised three onshore private fund managers, namely Rosefinch, Top Fund Investment and Huili Asset Management. The fund is not yet authorised for retail investors but available to institutional investors.
Foreign fund houses look likely to seek out such reputable private fund players to help satiate their onshore investing needs.
Wholesale foreign funds
Meanwhile, one of the hottest topics among global managers is the trend to establish wholly foreign-owned enterprises (WFOEs) in China – or 100%-owned onshore entities able to conduct advisory business and, potentially, to operate as domestic private fund managers.
It could be a while before such licences emerge, due to competing priorities.
China made agreements with the US and UK governments last year and Aberdeen, Fidelity, Bridgewater have set up investment management WFOEs thus far, with a view to accessing this Rmb6 trillion ($911.7 billion) market by investing in domestic capital markets and manufacturing products for wealthy and institutional Chinese clients.
But they are now waiting for Amac to complete their registration and they may need to be patient. Many other global fund houses have also set up WFOEs in China, but can only conduct consulting or advisory business.
“I think it may take a longer time [to see official approval], because the regulator has been busy since [the] market rout last year. The priority this year is to regulate P2P and disordered private firms,” said Jessie Liu, a research analyst at Shanghai-based consultancy Z-Ben Advisors.
The policy’s direction will not change, but the opening will likely delayed, Liu said.