Hedge Fund Winners and Losers of China’s Sudden Crackdown
(Bloomberg) -- A meltdown in Chinese stocks last month caught at least half a dozen Asia-based hedge fund managers flat-footed, leaving them nursing losses and pondering Xi Jinping’s next move.
Franchise Capital, Brilliance Asset Management and Snow Lake Capital’s China fund were among the casualties after sweeping moves to rein in the private sector caught the wider market by surprise. The gyrations sent others surging as CloudAlpha Capital Management, and Mingshi China Optima Master Fund scored double-digit gains, while Dantai Capital and Anatole Investment Management also made money, according to people familiar with those funds and documents sent to investors.
The diverging performances underscore how Beijing’s crackdown on the nation’s technology companies has sent ripples through the financial sector. Anti-monopoly probes against Big Tech, cybersecurity reviews for foreign listings and ordering some tutoring companies to become non-profits have roiled markets, leaving hedge fund managers sifting through the wreckage and wondering what is next.
“We were surprised by the speed of the sell-off,” Dawid Krige, London-based chief investment officer of Greater China specialist Cederberg Capital wrote in a July newsletter. “There were broader concerns around whether this action against the largely foreign-owned education sector was also a signal that China’s stance on overseas capital had changed.”
Here are some of the July and year-to-date returns for hedge funds with exposure to China, according to fund updates and people familiar with their performance:
Snow Lake, Tybourne Capital Management, Anatole, Brilliance and CIF Asset Management Ltd., which manages the Chaos fund, all declined to comment. Dantai, Golden Pine and Franchise did not reply to emails seeking comment. The remaining hedge funds provided numbers or confirmed the accuracy of their performance estimates.
The movements caught managers by surprise, leading to rare losses. Franchise’s fund dived 17% before fees in July, according to an estimate shared with investors. That’s a reversal of fortune for Hillhouse Group alumnus Simon Wang, whose firm was among last year’s best performers with a 203% return, according to a newsletter seen by Bloomberg News.
Snow Lake’s China hedge fund lost money on bullish bets on Chinese education stocks, according to a person briefed on the situation. The fund also saw bearish wagers against a few stocks go awry because of company-specific reasons, said the person, who asked not to be identified as the information is private.
China’s sweeping clampdowns on everything from financial technology to e-commerce, ride-hailing, food delivery and now education have hurt funds with bullish exposure to those industries. Investors are now dumping shares in any sector that receives criticism in state media, from digital gaming and e-cigarettes to property and baby formula.
Likewise snared by sharp selloffs in technology and education stocks was the long-only Cederberg Greater China Equity Fund, which posted the largest monthly loss in its near-decade-long history. Brilliance’s Greater China-focused Brilliant Partners Fund had gained a cumulative 403% over eight years to June before slumping almost 22% in July, according to people with knowledge of its performance. The firm’s founder told investors last month that he’d made a mistake in underestimating the impact of Beijing’s reforms in the education sector. Tybourne, a manager of more than $7 billion in various funds, has since trimmed this year’s loss in its hedge fund to single digits, one of the people said.
At least some hedge funds capitalized on the opportunities as markets whipsawed. CloudAlpha’s hedge fund, which gained 137% last year, jumped about 20% in July to nearly erase losses from earlier this year, said people with knowledge of the matter. The about $50 million Mingshi China Optima Master Fund, co-led by Lewis Prescott and Yu Yuan, made similar gains before fees in July using a quant investment approach that combines academic research and machine learning, while Jason Xiang’s Dantai extended gains this year.
The flagship hedge fund of Anatole Investment Management extended returns this year, having made money during July from bearish bets, said a person with knowledge of the matter. The Hong Kong-based firm oversees about $4 billion in various funds, investing globally with heavy exposure to technology, Internet and consumer industries.
|Read more on July hedge fund performances|
|Goldman’s China Hedge Fund Clients Had Second-Worst Month Ever|
|Fund Manager Nursing Loss in China Stocks Says He Made ‘Mistake’|
Foundation Asset Management’s China fund avoided deeper losses, having sold out of e-commerce company Meituan after China’s new five-year plan drafted in late 2020 emphasized “social equity,” said Chief Investment Officer Michael Liang. It has not held any Chinese education stocks since the end of 2020, as they became over-priced with reduced competitive advantage, he added. Instead, it has favored cheaper-valued industrial companies.
As challenging as July was, it was not completely uncharted territory for some. In 2020, Snow Lake’s China and Asia funds bounced back from a double-digit losses to post gains of 13% and 22% respectively by year-end, the person familiar said. The firm manages about $2 billion between hedge and long-only funds. Its China hedge fund has recorded one annual loss in its 11-year history, falling 3.2% in 2019.
“While much red ink has been spilt about recent government intervention, the signals around most of Chinese business remain encouraging,” Krige wrote, lauding China’s attempts to balance entrepreneurship with social utility. “The next few months are likely to be volatile and the market may well plumb new lows. But we are starting to get excited about the valuations of most of our holdings.”
©2021 Bloomberg L.P.