In what has been a largely mediocre year for hedge funds across the board, one China-based fund is having a standout year.
The Golden China Fund, managed by George Jiang of Shanghai-based Greenwoods Asset Management, invests virtually all of its money in China-related companies. Despite enduring a midsummer rout from China’s stock market crash, the fund is all but assured of posting its fourth straight double-digit annual gain.
Golden China posted a gain of about 2.7 percent in November after surging more than 11 percent the previous month. It is now up about 22 percent for the year. This easily exceeds the 8.85 percent loss posted by the MSCI China Index. In November the fund — perhaps the best performing China-focused fund with a long-term track record — also exceeded $2 billion in assets, double what it had just about one and a half years ago.
Since its July 2004 inception, the fund has produced an annualized compounded return of nearly a 28 percent. This includes its disastrous 2008, when it lost 52 percent.
Jiang is a pioneer in the Chinese securities business. Before launching Greenwoods, he worked at the Shenzhen Stock Exchange beginning in 1992, serving as the general manager of its bonds and futures department. He received a master’s degree from the Graduate School of the People’s Bank of China, with a major in economics.
The Golden China Fund is an equity long/short fund that seeks out companies generating most of their business from China. It takes a top-down and bottom-up view and employs a value-investing approach, seeking out value stocks and so-called GAARP stocks (growth at a reasonable price).
Most of its net long exposure is to American Depositary Receipts (ADR’s) and U.S.-listed Chinese stocks. As of the end of November, the portfolio’s long holdings had a $12.1 billion average market capitalization and a 9.5 price-earnings ratio on 2015 estimated earnings, which the fund estimates will grow at 22.3 percent.
In July and August the fund’s performance was hurt badly when the euphoric China market collapsed. However, the fund rebounded sharply in October, mostly driven by long positions in two travel service providers, two Internet companies and a liquor company, according to its October monthly report. On the other hand, it was hurt that month by short positions in two futures contracts, a developer, a machinery company and a dairy company.
“China equities performed strongly in October, driven primarily by improvement of investor sentiment and China’s continuous easing monetary policies,” the fund’s October report states. Golden China also benefited from deals, such as Alibaba Group Holding’s full takeover of Youku Tudou, the largest online video portal in China, and online travel company Ctrip’s acquisition of the 40 percent stake of Qunar, the second-largest Chinese online travel service business, from Baidu.
November performance was driven by the long positions in a travel service provider, two Internet companies and a financial services provider, as well as a short position in a futures contract, according to the fund’s report.
For the first 11 months of the year the biggest drivers of performance were U.S. listed ADRs of Chinese companies, such as Ctrip; Sina Corp., a Chinese online media company; Youku Tudou; some China-listed A shares and B shares; and short positions in certain Hong Kong-listed H shares.
The fund’s net exposure usually ranges between 50 percent and 70 percent. This said, the fund aggressively took down this net from 78 percent in October to 49 percent at the end of November, as it took some profits ahead of the anticipated interest rate hike by the U.S. Federal Reserve.
“In November we were uncertain about how much of a rate hike there would be in the U.S.,” concedes Joseph Zeng, a partner at Greenwoods, in a telephone interview. “So, we cut our net exposure for risk management purposes. Now the shoe fell and the valuation of China equities remains attractive, so we will gradually bring exposure back up.”
The fund’s largest holdings among the U.S.-listed stocks and ADRs as of the end of the third quarter were Sina; Soufun Holdings, a Chinese real estate Internet portal; Youku Tudou; and Ctrip. The four stocks accounted for a total of about 54 percent of its U.S. holdings. The stocks were up 26 percent, 1.5 percent, 52 percent and 70 percent over the October-November period, respectively.
Looking ahead to 2016, the firm is cautiously optimistic about the China equities market, concerned that the economic slowdown may continue until the second quarter.
Even so, it sees several catalysts in the future for the equity market. They include additional cuts of the interest rate and the required reserve ratio of banks, tax cuts for corporations and individuals, and a potential liberalization of the Chinese hukou system, which is a residency registry system that restricts the mobility of Chinese laborers.
Zeng adds that if the Chinese renminbi devalues against the U.S. dollar, this would be good for the Chinese economy, similar to what happened a few years ago, when the devaluing of the Japanese yen sparked a bull market in Japanese equities.
