Wave of China sunshine funds coming to HK

A growing number of sunshine private-trust funds* – China’s equivalent of hedge funds – are considering establishing operations in Hong Kong with a view to raising money from global investors.

A dozen or more hope to set up in Hong Kong next year "based on the conversations we’ve had”, says one senior consultant based in the city. One is Shanghai-based TrustBridge, which manages the equivalent of about $2 billion.

These firms manage renminbi-denominated pools set up by trust companies that raise money from wealthy Chinese, with a minimum investment of Rmb1 million ($160,000). Advisers are then hired to run investments.

They are “focusing very much on raising capital from offshore, and all have significant ambitions for alternative investments”, says the unnamed source. They take in money via managed-account platforms and also offering co-mingled funds, he adds.

Sunshine funds are looking to raise “hundreds of millions of dollars”, notes the consultant. A target of $500 million is a reasonable expectation within 12 months of coming to Hong Kong, he says, given their “very credible relationships” with institutional investors in the US.

However, these firms are lightly regulated in China, so it’s common for those eyeing Hong Kong operations to need a lot of education on what’s required of them, he points out. "The fact you will be regulated, you need independent directors, and so on – all that is quite alien to them.”

A Hong Kong-based lawyer makes a similar point. “We’ve had some smaller China hedge fund managers approach us for help with setting up structures,” he says, “but as soon as we ask them to appoint a China counsel, we don’t hear from them again.”

Sunshine fund managers may also need to reconsider what they invest in, notes the unnamed consultant, as they generally focus on listed markets, where competition is fierce already.

“Many are looking to build Asia-Pacific-type products or even US or European equity products,” he adds, “but I’m not sure what the value-add is for them to do that. Still, they're very keen and have a high expectation of success.”

An alternative route to accessing the international markets could be through acquiring an established fund manager. “I’d be interested to see if there are any significant transactions in the next 12 months," says the consultant. "If there are, they are less likely to be in the alternatives space.”

The Alternative Investment Management Association (Aima) is putting a strong focus on this industry and is looking for a credible way to take the association to China, says the executive. This is also working the other way, with Aima seeking to get these managers to engage with it.

“There’s a risk that they may form a China managers’ forum, stay insular and not engage so much with Aima,” he notes. “‘However, it’s likely those who want to work with international investors and invest globally will get involved in a wider discussion with Aima.”

Several such private-trust funds have already been established in Hong Kong, including Greenwoods Asset Management, Prime Capital and Springs Capital, the latter set up by former Harvest Fund Management staff.

*A feature on these funds will appear in the forthcoming (December) issue of AsianInvestor magazine.