The past year has been brutal for China’s equity markets. The Shanghai–Shenzhen CSI 300 Index plunged 40 percent from June 2015 through May 2016, while Hong Kong’s benchmark Hang Seng Index dropped by about 25 percent during the same period. So it’s all the more impressive that Shanghai-based hedge fund firm Greenwoods Asset Management Co.’s Golden China Fund still produced a net gain of 22 percent in 2015, thanks in large part to savvy bets on two technology stocks.
Greenwoods had accumulated a stake of as much as 5.6 percent of New York Stock Exchange–listed Youku Tudou, a Chinese video-sharing website, and a less than 5 percent stake in Nasdaq-listed Chinese online travel agency Ctrip.com International. Both companies posted big share price gains last year on news of merger and investment plans. On October 16, Chinese e-commerce giant Alibaba Group Holding made a “going private” proposal to acquire Youku Tudou for $4.8 billion in cash, or $27.60 per American depositary share. The price represented a premium of 35 percent over the closing price of Youku Tudou’s ADSs one day earlier. Also in October, Ctrip got a major boost when news broke that it was acquiring a stake that would give it 45 percent aggregate voting rights in rival online travel agency Qunar Cayman Islands. Ctrip shares were trading at $46 in mid-August, an increase of nearly 200 percent since early-October 2015. Greenwoods reaped hefty gains that erased any possible declines from Chinese markets.
“We made several home runs from American depositary shares of some high-quality Chinese companies and survived the A-share market’s big correction in 2015,” says Joseph Zeng, the partner in charge of the firm’s office in Hong Kong, referring to shares that trade locally on China’s two renminbi-denominated stock exchanges.
If Asia’s plummeting equity markets have proved anything, it’s that there are still markets in the world where an investor can not only beat the market but trounce it through good old-fashioned stock picking. Greenwoods’ acumen helped it retain its position as the third-largest hedge fund firm in Alpha’s 2016 ranking of the biggest 25 hedge fund managers in Asia. Topping the list for the third year in a row is Beijing’s Hillhouse Capital Group, with $20 billion in assets, followed by Hong Kong–based Value Partners, with $14.6 billion under management. Greenwoods, which now manages $5.5 billion, is followed by new entrant Graticule Asset Management Asia. The Singapore-based firm was founded by former Fortress Investment Group (Singapore) CEO Adam Levinson in 2014 and manages $4.4 billion. Central Hong Kong–based Myriad Asset Management rounds out the top five, with $4 billion under management. All told, the top 25 hedge funds in Asia managed a combined $90 billion as of April 1, down 15 percent from the previous year.
Most of Asia’s largest hedge funds were rocked by the region’s volatility last year. In China investors bid markets up to bubble territory during the first five months of 2016, only to see them come crashing down, while in Japan investors became skeptical that Prime Minister Shinzo Abe’s economic policies would save the nation from its deflationary trap. The Nikkei 225 plunged 20 percent from a peak of 20,724, reached on August 7, 2015, to 16,500 on August 19 of this year. Corrections in Asia’s equity markets reverberated globally, and many of the top 25 hedge funds in the region subsequently lost assets.
The roller-coaster markets were challenging even for Greenwoods, whose assets fell by 4 percent in the 12 months through April 1. The firm’s Golden China Fund, which invests primarily in Chinese companies listed outside the mainland (chiefly in Hong Kong and the U.S.) and which profited so handsomely last year, was down 8.6 percent in the first quarter of this year. But Zeng remains optimistic that savvy stock picking will save the day this year as well.
Asian hedge fund pioneer Cheah Cheng Hye shares that sentiment. The Value Partners co-founder remains confident about his firm’s long-term value-investing strategy, even though his fund management company suffered its worst performance in four years in 2015. Cheah’s flagship Value Partners Classic Fund delivered net losses of 1.5 percent in 2015 and 10.1 percent in the first quarter of this year. Companywide profits at Value Partners Group, the Hong Kong–based long–short asset manager that operates the fund, fell 66 percent to HK$274 million ($35 million) in calendar-year 2015 — its first decline since 2011. The firm’s assets under management stayed mostly steady, down slightly from $14.7 billion a year earlier.
“It was our most difficult year since 2008,” Cheah says, adding that the company recently had to issue a warning that its profit for the first half of 2016 may be worse than expected. “The environment in our main market, which is China-related equities, has been very difficult. China experienced a minicrash and has been struggling to recover.”
Cheah notes that despite the short-term troubles, his firm has been able to weather the storm. “The good news is in the past month or so performance has picked up strongly,” he said in early August.
Successful stock picking is more important than ever in volatile markets, confirms Shuhei Abe, group CEO of Tokyo-based SPARX Group Co., Japan’s largest hedge fund manager, whose operating profit rocketed 109 percent to ¥2.98 billion ($28 million) in the 12 months ended March 31.
“SPARX has done quite well despite the volatile environment,” Abe says, adding that investors have started to review the effectiveness of Prime Minister Abe’s economic policies, known as Abenomics, and have come to believe that they may be running out of steam.
The key to successful stock picking is solid research, SPARX’s Abe says, adding that he personally oversees a team of more than a dozen analysts in offices in Tokyo, Hong Kong and Seoul, and supervises them as they do on-the-ground research, including making a high number of company visits to meet top managers.
Despite SPARX’s solid performance in the past year, the firm falls two places to No. 8 because its rivals elsewhere in Asia outgrew it. The firm managed $3.4 billion through April 1, down slightly from $3.5 billion a year earlier.
Still, CEO Abe remains upbeat about Japan’s financial markets and the future of SPARX. He notes that Japanese households collectively have more than $14 trillion in cash savings and are only now beginning to diversify into equities. In April the Japanese government launched an investing program that is similar to the individual retirement account in the U.S. Abe says the program — known as Nippon Individual Savings Accounts — will attract many new investors to the equity markets. “It is very natural that Japanese are among the most conservative investors in the world, but they are beginning to think seriously about supporting the long-term growth of corporate Japan,” he adds.
Many opportunities still exist in China, says Greenwoods’ Zeng. He thinks market valuations have overpriced the economic slowdown in China, which continues to grow at a higher rate than most other countries in the world.
Of course, there are skeptics to be found. Longtime China bear Kyle Bass of Dallas-based hedge fund firm Hayman Capital Management launched two new funds this summer that will trade on his view that China is on the verge of a banking crisis that will damage its economy and currency. Bass is particularly concerned about the fast pace of credit expansion among Chinese banks, which he fears will lead to hefty credit losses and require the banks to recapitalize, according to a letter he sent to clients in February.
Longtime investors in the region, while acknowledging its volatility, do not share Bass’s pessimism. “Let’s not forget this is not the first time we have experienced this level of volatility across Asian markets,” says Pablo Urreta, head of research at London-based hedge fund investment advisory firm Sussex Partners. Urreta and his team advise more than 100 large institutional investors that collectively manage more than $3 trillion in assets. “We strive to identify managers in Asia who can face challenging periods but remain in control and adapt without drifting away from their core skills and unique styles,” he says.
As an investor for almost 30 years, Value Partners’ Cheah fits that description. “A big part of my medium-term strategy is to tap into China,” he says. “Deregulation and relaxation of capital controls are inevitable. The pace of reforms can slow down but won’t stop. In the not-too-distant future, I see China to have the biggest pool of savings in the world. It’s the golden opportunity of a lifetime for a fund manager like me.”
