Losses and liquidations: China private fund sector losing its lustre

China’s once impregnable private funds sector is fast losing its lustre amid severe losses, liquidations and mismanagement on the back of a domestic stock market correction this year.

The sector, which has grown exponentially since its 2005 beginnings, has recorded an average return of -6.74% to date this year, with just 14% of private funds achieving a positive figure, according to Shanghai-based data provider Suntime Corporation.

Industry spokespeople believe the sector is now entering a new stage of development in which private fund managers will have to demonstrate persistent performance and competent management to survive what is an increasingly competitive environment – much like their mutual fund counterparts.

Some private fund managers who adopted aggressive strategies and held concentrated positions in the A-share market achieved star status on the back of phenomenal returns. However, this year’s stock market correction – the Shanghai Composite index sank 14% from mid-April to late June – has left them licking their wounds.

Among them is Luo Weiguang, who hit the heights in 2009 with an annual return of 193%. However, two private funds managed by his firm New Value Investment have been among four to suffer the highest performance drawdown of 28% to June 24, finds data from Rongzhi Rating.

Meanwhile, Shi Tong Asset Management – a sector champion last year with a 96% gain – saw its six finds suffer losses of between 9% and 22%.

Aside from performance, the sector’s reputation has been further tarnished by a spate of front-running scandals and mismanagement issues.

Cape of Good Hope Investment – established in 2007 by former star manager Zheng Tuo of BoComm Schroder – liquidated two private fund products sold under Shandong Trust, last December and this April. The latest net value of these funds was 0.661 and 0.6107, respectively.

Meanwhile, Zheng and Li Xuli, the former CIO of BoComm Schroder, were both investigated by the China Securities Regulatory Commission for alleged front-running. Li formerly worked for Chongyang Investment, the largest private fund in China, where he served as CIO from July 2009 to October 2010.

Long Fang, deputy director of RongZhi Rating, points out that increased industry competition has helped to expose a number of companies whose research, investment skills and product management have not been up to scratch – leaving them at the mercy of market selection.

But Zhang Zibing, chief operations officer at Suntime Corporation, points out that this very competition means the private funds industry is growing healthier. “The setback that private funds have experienced this year is temporary. In the long term, talented investment managers will continue to emerge to keep the industry growing.”

According to Suntime data, 322 private funds have been launched this year, with the overall AUM of the sector increasing to Rmb162 billion as of June 20, from Rmb147 billion at the end of last year.