Asian hedge funds hit record on China rally, now starting to buckle

Singapore, June 19: Asia’s hedge funds boosted their assets to a record $177 billion in May by riding a Chinese stocks rally that’s now starting to falter.

Investments by funds with an Asia mandate exceeded the $176 billion in December 2007, before the global financial crisis, Alexander Mearns, chief executive officer of Singapore-based data provider Eurekahedge, said in an interview on June 17.

“Chinaistheshiningstarin terms of returns,” Mearns said. “If we are seeing the sameinflowsaslastyear,andif the performance continues at the pace we have seen, Asia’s hedge-fund industry could cross the $200 billion mark very soon.” North America hedge-fund assets under management are $1.5 trillion, according to Eurekahedge.

China’s market capitalisation has almost doubled to $9.6 trillion this year, helping the returnsof hedgefundsinvesting in the country. Future gains may be limited as bearish sentiment is spreading

China’s mkt value has almost doubled to $9.6 trillion this year, helping the returns of hedge funds. But future gains may be limited as bearish sentiment is spreading

droppedmorethan10%froma June 12 peak.

An end to the China rally would “wipe out a lot of the organic growth that we have seen that has come from performance over the last quarters,” said Mohammad Hassan, a Eurekahedge analyst.

The Shanghai gauge retreated 13% this week, signaling a correction. It has more than doubled in the past 12 months and trades at 18 times 12-month projected earnings.

“We are seeing stretched valuations in China’s stock markets,” said Melvyn Teo, professor of finance at Singapore Management University. “If there is a correction, that willdefinitelyaffecttheequity long-short hedge funds investing in the market, especially those that have not capped their downside risk.”

The Eurekahedge Greater China Hedge Fund Index has gained 25% this year, helping make hedge funds in Asia the best performers globally. The Eurekahedge Asian Hedge Fund Index advanced 11% to the end of May, more than the 2.8% gain in the North Americaindexandthe6.4%increase in the Europe gauge.

Assets under management of Asia-focused funds have grown by 10%, or $16 billion, during the first five months, Hassan said. About $4 billion came from net inflows and $12 billion from performance.

Hedge funds investing in China make up about 40% of all hedge-fund assets invested in Asia. The $3.8 billion APS ChinaAShareFundandrelated accounts under the same strategy returned 67% this year to the end of May, while the Golden China Fund returned 25%.