Trump’s trade war has hedge funds diving for cover in China

DONALD Trump’s threats of a trade war with China is sending jitters through the hedge-fund community.

Pinpoint Asset Management and SPQ Asia Capital have recently cut a measure of risk called net exposure – the difference between bullish and bearish bets – for hedge funds that invest in China.

FengHe Asia Fund, which focuses on China, Taiwan and Vietnam, has reduced its allocation to Chinese stocks to the lowest level since 2012.

“The trade spat is the last straw,” said Matt Hu, co-founder of Singapore-based F&H Fund Management who manages the US$240mil FengHe Asia Fund, who started paring Chinese financial and manufacturing stocks last year in favor of Vietnamese companies.

China’s equity market has been recovering from its mid-2015 crash, helping power the best performance in eight years in 2017 for hedge funds investing in the region. But the gains are imperiled by Trump’s determination to wring concessions from Beijing.

Elevated US-China tensions spiraled into threats of tit-for-tat tariff retaliations this week, which some analysts predict could cut as much as 0.5 percentage points off China’s economic growth. The Shanghai Composite Index fell 4.8% this week through Thursday.

Some domestic managers and offshore China hedge funds have reduced their holdings amid growing trade worries, William Ma, chief investment officer of the US$23bil Gopher Asset Management unit of Chinese wealth manager Noah Holdings, said in an interview.

Average net exposure for Asia long-short hedge funds has dropped to 40%, from about 50%, over the first four months of this year, said Richard Johnston, Asia head of Albourne Partners.

“Many still don’t think fundamentals have changed, so I didn’t expect to see a large reduction,” said Johnston, whose firm advises clients on more than US$450bil of alternative investments including hedge funds.

“Most have learnt from experience not to try to time the market. The last few days may have spooked some a bit.”

A Eurekahedge index tracking Greater China-focused equity longshort hedge funds gained 4.6% in the first five months, far behind the 32% surge for the full year of 2017.

Pinpoint Asset Management slashed net exposure in its roughly US$1.4bil China-focused hedge fund by about 20% to the lower half of the 30% to 50% range it has historically maintained, said Curtis Man, a Hong Kong-based executive director.

SPQ Asia Capital has cut the same risk measure of its Greater China long-short equity hedge fund by about 10 percentage points this year, said chief operating officer Gregoire Dechy.

Pinpoint, which oversees US$3.7bil in various funds, had cut its exposure as early as last and increased it after market selloffs earlier this year. Over the past two weeks, it reversed course again as tensions started to flare up.

Pinpoint has also turned cautious towards Chinese companies with export-dependent businesses since the beginning of the year, said Man. About three months ago, it started taking bearish bets on some Chinese makers of automo- bile and auto parts, he said.

China announced in May it was cutting import duties on passenger cars in a gesture to further open a market that has been a prime target of US complaints.

The trade dispute compounds worries about interest rate hikes and high market valuations, SPQ’s Dechy said of the firm’s decision to trim risks. SPQ’s hedge fund had an average net exposure of around 30% in the last 4½ years, Dechy said, declining to disclose the fund’s assets and other details.

The Federal Reserve raised interest rates on June 14 and signalled a path of faster increases this year, sending stocks down.

Last year’s 52% rally pushed the price-earnings multiple of MSCI China Index, which includes Chinese technology giants listed offshore, to a post-2010 high. — Bloomberg