BFAM’s $4 Billion Hedge Fund Heads for Annual Loss on China Bets

(Bloomberg) -- BFAM Partners’ more than $4 billion hedge fund is heading for the first annual loss in its nine-year history, caught out by the sell-off in China real estate credit.

The BFAM Asian Opportunities Fund has lost more than 10% in the first 11 months of the year, according to people with knowledge of its performance. It dropped about 7.5% in October and another 3.3% in November, they said, asking not to be identified because the information is private. 

The fund suffered from selling pressure in Chinese real estate bonds, said three of the people. Katarina Royds, who leads investor relations at BFAM, declined to comment.

China Evergrande Group and Kaisa Group Holdings Ltd., two of the most prolific Chinese real estate dollar debt issuers, roiled markets for months before defaulting on debt obligations as the government clamped down on excessive borrowing and property speculation. Fears of financial contagion sent the yield investors demand for holding Chinese junk bonds to a record high on Nov. 9, triple its five-year average, according to a Bloomberg index.

The Hong Kong-based hedge fund firm, led by former Lehman Brothers Holdings Inc. proprietary trader Benjamin Fuchs, oversaw $4.9 billion in August, according to an earlier fund document. It counts credit, equities and volatility as its core trading strategies. The credit investments, which include high-grade, high-yield, credit default swaps and special situations, are led by Eugene Fung.

The declines in the last couple of months underscore how even the region’s savviest traders have faced challenges navigating a year dominated by regulatory headlines in China. While there have been monthly losses, the BFAM fund’s previous winning streak in calender years since June 2012 was rare in a region where individual hedge fund performances could be choppy.

Fitch Ratings branded Evergrande a defaulter last week, the latest milestone in a months-long saga that will likely lead to a lengthy restructuring and deep haircuts for bondholders.

Sentiment for Chinese real estate debt took a dive in early October, when Fantasia Holdings Group Co. missed a debt payment after saying it had sufficient working capital and no liquidity issue. Market sentiment has improved in recent weeks on signs that Chinese policy makers are easing up on the leverage crackdown, though curbs are expected to remain.

The exact details of BFAM’s China credit holdings aren’t known. A gauge of junk bonds issued by Chinese property developers plunged 21% in October and another 4.9% in November.

BFAM has faced similar setbacks in the past. The firm’s Asia high yield-focused credit investments contributed to a 17% loss in the March 2020 market rout at the onset of the pandemic. It largely held on to the assets, and a price rebound later in the year helped it to an 8.5% annual gain.

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