CSOP, Hermes ready RQFII 'sunshine' product

CSOP Asset Management has partnered the UK's Hermes to launch a landmark A-share fund that will use ‘sunshine’ private hedge fund managers as sub-advisers under China's renminbi qualified foreign institutional investor (RQFII) scheme.

The Ireland-registered Ucits vehicle was officially approved by the country’s regulator on Tuesday last week, and the IPO funding period is slated to finish at the end of this month.

The fund has attracted almost $50 million since it was incepted on August 5 and has a target size of $150 million, said Jack Wang, head of sales at CSOP, the Hong Kong unit of mainland fund house China Southern.

European and Asian investors – including family offices, insurers, pensions and private banks – have so far made commitments to the CSOP Hermes China A-Share Fund.

Jack Wang

In its initial stage, the new fund will hire three sunshine fund managers, which will act as sub-advisers. They are Rosefinch Investment, Top Fund Investment Management and Huili Asset Management, all based in Shanghai. Their respective investment styles are conservative growth, value investment and aggressive growth.

The initial investments will largely mirror the existing sunshine funds run by the managers.

As the investment adviser, Hermes is responsible for selecting and allocating to the sub-advisers, based on operational and quantitative due diligence, and according to market conditions.

As of May, there were about 2,500 Chinese sunshine investment trusts – private, closed-end pool funds thought to comprise mostly hedge fund-type strategies. Property trusts and private equity funds also fall into the classification.

“Foreign investors are becoming more interested in Chinese sunshine funds as A-share sentiment improves, but they are concerned about risk as they are not familiar them,” said Wang.

Sunshine funds are usually run by fund firms under trust companies. Many of them are run by star managers who previously had good track records whilst working at traditional mutual fund houses. Last June, sunshine funds were brought under the supervision of the China Securities Regulatory Commission, having previously been unregulated.

Sub-advisers to the CSOP-Hermes fund should have assets under management of more than Rmb1 billion ($162 million) and have at least a three-year track record, said Wang, although there is no official restriction.

CSOP will consider launching a mutual fund structure in Hong Kong if the A-share fund is well received, said Wang. The trio of managers could be expanded to as many as six as the fund grows.

The five-year average annualised return of the current three sunshine managers’ existing funds combined is around 10.6%, and their Sharpe ratios for last year ranged from 1.8 to 2.

The three firms currently run long-only positions and do not use leveraging because of the constraints imposed by RQFII rules, noted Wang. RQFII funds can only invest in futures for capital preservation and are not allowed to run short positions.

The fund’s managers will be allowed to hold 100% of the investment in cash to give them flexibility, added Wang. The fund has an annual management fee of 2% and fund managers will receive a performance fee of 20%, a fee structure common for hedge funds.

Of RQFII licensees, CSOP has the largest RQFII quota, of Rmb44.6 billion, while Hermes managed $45 billion as of the end of June.