China Hedge Funds Face Worst Month in 16 Years After Carnage

September 1, 2015

4 hours ago

China-focused hedge funds probably had their worst month in almost 16 years in August, with firms including Orchid Asia Group Management and APS Asset Management Pte suffering losses from the nation’s stock market collapse.

Greater China hedge funds plunged an estimated 10 percent in August, putting them on track for their biggest decline since at least January 2000, according to preliminary estimates from Eurekahedge Pte. The Orchid China Master Fund, a $304 million strategy managed by Hong Kong-based Orchid, fell an estimated 7.3 percent, according to a month-end investor update obtained by Bloomberg News. APS’s Greater China Long/Short Fund declined 7.2 percent in the month through Aug. 28 as the firm’s China A Share Fund fell 5.5 percent as of Aug. 21, according to a month-end update.

Hedge-fund investors are getting an early glimpse of the carnage after market declines that began in China in June deepened and spread across the globe. Volatility in oil and concerns about slowing growth in China rattled markets worldwide and even hurt prominent U.S. hedge funds. David Einhorn’s Greenlight Capital declined 5.3 percent in its main hedge fund last month, according to an e-mail to investors. Leon Cooperman’s Omega Advisors and Bill Ackman’s Pershing Square Capital Management saw their gains for the year wiped out during the worst of August’s market decline.

“Greater China hedge funds are on track to show the worst three month returns in at least a decade,” said Mohammad Hassan, an analyst with Eurekahedge in Singapore. “It’s not a surprise given the funds’ limited ability to short the stock markets in China.”

Stock PlungeThe Shanghai Composite Index dropped 12.5 percent in August after sliding 14 percent in July, the biggest two-month tumble for the market since 2008. Losses at many hedge funds investing in the region may have been unavoidable because Chinese regulators cracked down on practices such as short selling. Authorities have been probing “malicious” short selling, or wagering against stocks, and have examined futures trading accounts of foreign investors.

China hedge funds were among the best performers in the industry before the August rout. The Eurekahedge Greater China Hedge Fund Index was up 10.5 percent through July, compared with the 6.8 percent return for the Asian Hedge Fund Index. Eurekahedge won’t have the year-to-date return for China hedge funds through August until later this month.

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Even with the rout in August, APS’s Greater China fund was up 27.7 percent this year through Aug. 28, while the Orchid fund fell 1.9 percent for the year. The Shanghai Composite Index had fallen 0.9 percent in 2015 through the end of August.

Rare ProfitThere were firms that managed to shine during the market meltdown, thanks in part to flexible strategies that allowed them to invest across global markets. The $90 million True Partner Fund in Hong Kong, run by co-chief investment officers Tobias Hekster and Govert Heijboer, surged 7.5 percent on Aug. 24, the day an 8.5 percent plunge in the Shanghai Composite Index triggered a selloff across the globe. The single-day jump for the fund, accounting for its entire month’s gain, brought the year-to-date advance to 15 percent, according to Hekster.

The True Partner fund used a relative value strategy that benefited from rising market volatility that started in Asia and spread worldwide. As options owned by True Partner in the Taiwanese market exploded in value amid rising panic on Aug. 24, the fund sold them and bought cheaper ones in Korea and Japan, Hekster said. The fund then was able to time the sales of those options when their prices rose because of elevated investor anxiety and buy cheaper ones when the markets opened in Germany and elsewhere in the world.

“We were able to roll our positions from where anxiety was high to places where the anxiety was not yet at such elevated levels,” Hekster said in a telephone interview. “The dominoes kept on falling.”