By Mia Lamar
HONG KONG--A disappointing start to the year for Chinese stocks
is forcing some hedge funds to prove their mettle after banner
performances in 2014.
Stocks in mainland China are lagging behind major indexes in
Asia and elsewhere, testing hedge-fund managers that rode surging
share prices in the second half of 2014 and posted big returns.
China's unexpected easing of monetary policy and expansion of
foreign-investor access to stocks spurred the rally, which has
cooled after regulators cracked down on risky retail trading
practices and economic growth slowed.
Hedge funds still see the potential for profits by taking
advantage of big swings in a market dominated by retail investors,
who are often quick to buy or sell in response to market
chatter.
But the easy gains appear to be over. Stock hedge funds with an
emphasis on China gained 0.45% in January, compared with an average
0.87% gain for Asian hedge funds tracked by Credit Suisse Group AG.
Funds clung to gains as the MSCI China A-shares index, which tracks
mainland shares, slid 2% in January, its first slump in months
after a 43% surge in 2014. So far this year, the index is down
0.1%.
"The next three months will be much more of a trader's market,"
said Marlon Sanchez, head of Asia Pacific prime-finance sales for
Deutsche Bank AG. To make money, fund managers are thinking more
about how to bet on possible further policy changes in China, Mr.
Sanchez added.
A $65 million hedge fund run by Shi Lin, formerly a director at
Hillhouse Capital Group, gained 7.4% in January after fees were
taken into account, according a letter sent to investors that was
reviewed by The Wall Street Journal.
In the first week of January, Mr. Shi cut mainland stock
holdings in his Brilliant Partners Fund to 2% from 25% of its
portfolio because he believed the market was in "bubble territory,"
according to the letter. That move helped the fund dodge a selloff
in the Shanghai Composite, which slid 7.7% on Jan. 19 after
regulators cracked down on the use of borrowed money to buy
stocks.
The hedge fund returned 52% in 2014.
Other funds stuck with mainland shares but were able to post
gains. A fund launched in June by Neo-Criterion Capital to invest
in mainland-listed A-shares gained 1% after fees in January, taking
its return since inception to 45%, according to a letter sent to
investors. NCC, established by Thomas Deng, former chief China
strategist at Goldman Sachs Group Inc., and James Liu, a former
executive at APS Asset Management Pte., oversees $340 million in
assets.
Some funds didn't fare as well. A new stock hedge fund launched
by BosValen Asset Management that makes wagers across Asian markets
neither lost nor made money overall on A-share bets in January,
according to a letter sent to investors.
As a result, the fund reduced its exposure to A-shares to about
20% of assets from about 30%, Ken Xu, BosValen's chief investment
officer, said in an interview. Mr. Xu, a former managing director
at SAC Capital Advisors LP, launched the $265 million fund in
November with Simon Kemp, formerly a trader at Mount Kellett
Capital.
In China, "you need to be patient," Mr. Xu said. "There are good
months and bad months."
Some hedge funds continue to boost bets on Shanghai stocks by
scooping up shares still perceived as bargains, said Matt Kiraly,
head of sales and marketing for HSBC Holdings PLC's Asian prime
finance division.
Other funds are delving into Shenzhen stocks, Mr. Kiraly added.
While smaller than Shanghai's, Shenzhen's stock market is home to
many of China's "new economy" stocks in sectors like technology and
environmental protection.
Last year, Shanghai stocks climbed ahead of the November opening
a trading link that connected the Hong Kong exchange to the local
market and gave foreign investors easier access to Chinese shares.
Hong Kong Chief Executive Leung Chun-ying has said the city is
working with central authorities on a link to Shenzhen's
market.
Stocks in Shenzhen are trading sharply higher in anticipation.
The Shenzhen Composite is up 14% so far this year.
Write to Mia Lamar at mia.lamar@wsj.com
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