Chinese boom for hedge funds at risk from trade dispute

Hedge funds betting on a China rebound have been delivering the kind of double-digit returns this year that most investors can only dream of.

Some fund managers are, however, starting to worry that the party may soon come to an end — spoiled by the deepening trade dispute between Washington and Beijing.

Funds betting on China have climbed 16.9 per cent this year, trouncing rivals in other markets, according to data group HFR.

London-based Marshall Wace, one of the world’s largest hedge funds with $39bn in assets, and Greenwoods Asset Management, a Shanghai-based outfit with $12bn of assets, are among those to reap big gains from Chinese share purchases.

The $2bn Golden China fund run by Greenwoods had surged 35 per cent in the year to early May, while Telligent Capital Management’s Greater China fund was up more than 20 per cent.

These strong performances reflect the recent rebound in China’s stock market, which quickly buried memories of last year, when it underperformed all other big markets.

Yet hedge fund managers are now nervously watching the trade dispute between the US and China as it casts a shadow over the outlook for Chinese corporate profits and starts to cause significant gyrations in global equity markets.

“It feels like the beginning of the year was almost a gift” for hedge funds, said Patrick Ghali, co-founder of Sussex Partners, which advises institutions on investing in hedge funds. However, he expects the US-China trade dispute to continue to weigh on economies and markets for years.

“This choppiness isn’t going to go away,” he said. “It’s becoming challenging for managers.”

Any confidence that the world’s two biggest economies would strike a trade deal was badly shaken last week, when US president Donald Trump raised tariffs on $200bn of Chinese goods from 10 per cent to 25 per cent. The unexpected move knocked high-flying Chinese stocks, unsettled Wall Street and shook major European markets.

China’s benchmark index, the CSI 300 index of Shanghai and Shenzhen-listed stocks, tumbled 5 per cent last week, cutting its gains for the year to slightly less than 24 per cent.

At Marshall Wace, this year’s gains for its Tops China fund — which stood at more than 41 per cent by early April — have fallen to 28 per cent, according to performance figures sent to investors. The London-based group declined to comment.

As well as wrongfooting markets, last week’s salvo by the Trump administration triggered a series of gloomy forecasts for both the global economy and corporate earnings.

Economists at Barclays forecast the extra tariffs could trim Chinese gross domestic product by half a percentage point over the next year.

However, many hedge funds are still bullish on Chinese stocks, with some of them counting on the positive effects of Beijing further opening its financial markets to the rest of the world. This trend has accelerated over the past year even as the White House sought to rewrite the US trade relationship with China.

The integration of Chinese stocks within global markets was given a fillip in March, when New York-based MSCI, the influential index provider, announced that the weighting of Chinese equities in its widely followed emerging markets benchmark would more than triple by November. The move was expected to increase investment in Chinese stocks by passive funds.

“I don’t think that this will be the end of the equity market rally,” said Jennifer Wong, managing director of Pinpoint Asset Management, which is based in Hong Kong and runs $3.6bn in assets. “Capital flows have been fairly strong into the A-share [shares listed on mainland China] market until May. We don’t expect a big pullback in terms of capital flows.”

Pinpoint’s $1.25bn China fund has gained 10 per cent this year to early May while its smaller China Plus fund, which runs punchier bets, is up nearly 20 per cent.

Other funds remain confident that the US and China will eventually agree a truce on trade. “Our base case is still very much that both countries need a deal — China needs a stable economy for it to push through further reforms while Donald Trump needs a political win to invigorate his re-election campaign which is just a few months away,” said Daniel Poon, managing director of Zeal Asset Management, a $1.2bn Hong Kong-based fund.

Zeal’s China fund was up about 11 per cent this year by early April but gains had slipped to about 9 per cent by early May, according to numbers sent to investors.

Some funds are starting to have second thoughts on the outlook for China. New York-based Key Square Capital Management, founded by Scott Bessent, the former chief investment officer of George Soros’s family office, has recently sold much of its China position, two people familiar with the matter said.

The managers of Key Square’s fund, which is up more than 8 per cent this year, have become concerned that the Chinese authorities are pulling back on monetary stimulus, one of the people said.

Mr Trump ratcheted up the level of concern among investors late on Friday by instructing Robert Lighthizer, the US trade representative, to start preparing tariffs on a further $300bn of Chinese goods.

Trying to navigate the fallout from the US-China trade war looks set to be the biggest challenge for hedge funds as they strive to maintain their positive start to 2019 and bounce back from the 4.8 per cent losses the overall industry suffered last year.

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