New rules, trade war push some China funds to struggle for survival

Fundraising by private funds has been on a steady decline, dwindling to 2.39 bn yuan in May, compared to 57 bn yuan a year ago, according to data from Shenzhen Qianhai Simuwang Fund Distribution Co

It's already been a harsh year for Chinese funds, hit by new rules aimed at reining in debt in the country's financial system. Now, the sell-off in China stocks induced by trade war anxiety further threatens their health and for some, their survival.

Case in point: private fund house Nanjing Hu Yang Investment Co has seen its assets under management halve to 50 million yuan ($7.5 million) over the past year on redemptions and investment losses.

Its chairman, Zhang Kaihua, said he is putting his funds, which bet on consumer stocks, into "a state of dormancy". He's also stopped publishing fund performances and shelved capital raising plans.

"Our only hope is that our existing clients can stick with us so that we can survive," he said, adding that he has seen many of his peers drop out of the market.

In the past when market turmoil has hit China's fund industry, such as in 2015, it has managed to bounce back on loose monetary policies and relaxations in rules for the sector.

But this time, asset managers face a double whammy of fleeing investors and a central bank keen to see a mopping up of excessive liquidity in the financial system - pointing to prolonged pain for the industry.

And as the US-China trade war heats up - the two slapped tariffs on $34 billion worth of each other's goods on Friday - the worry is that further declines in Chinese shares, which have fallen 10 per cent since late June to two year-lows, could be the last straw for some funds.

"If the market continues to be this bad, I expect to see more liquidations," said Ivan Shi, head of research at Z-Ben Advisors.

Redemptions and liquidations

According to Morningstar, fewer than 10 of the 800-plus Chinese equity mutual funds it tracks have made a positive return this year.

Even before trade war fears ramped up last month, changes to asset management rules first outlined in 2017 and aimed at encouraging banks to reel in their investments in stocks and bonds had taken their toll. Equity fundraising dwindled to minimal levels, while redemptions and liquidations spiked.

In the predominantly long-only mutual fund industry that numbers some 5,000-plus funds, 161 were liquidated during the first half of this year.

That's a jump from 102 for all of 2017, according to data from Z-Ben Advisors which notes that in the previous six years, the biggest number of liquidations was just 30 in 2015.

Figures for redemptions at balanced funds that invest in both stocks and bonds show a similar story. Just under 280 billion fund units, equivalent to 18 per cent of the total, were redeemed in the first half of the year. That compares with about 330 billion fund units for the whole of 2017.

Tony Zhao, a retail investor in several balanced funds, said he's thinking of opting out after losing 10-20 per cent of the principal in the funds.

"I'm considering selling when there's a rebound. The market correction this time is far more than I had imagined," he said, adding that he had expected Washington and Beijing would reach some sort of rapprochement over trade.

The private fund industry, where most players are long-only and relatively small, is particularly hurting.

Fundraising by private funds has been on a steady decline, dwindling to 2.39 billion yuan for the month of May, compared to 57 billion yuan a year ago, according to data from Shenzhen Qianhai Simuwang Fund Distribution Co.

"Fundraising is getting very difficult. We're in a bear market and I don't see improvement in the foreseeable future," said Wen Hao, CEO of fund manager Hao Fei Investment.

Wen said he's temporary shifting his focus away from the market and will concentrate on his hobby - internet filmmaking.

Crisis alpha

Market volatility has, however, proven a tailwind for funds with so-called "crisis alpha" strategies that are designed to garner positive returns in times of crises.

"Rising volatility in A-share market has enabled some of our quantitative strategies to shine this year," said Xu Xiaoqing, managing director of hedge fund house Preston Asset Management Co.

Preston's flagship arbitrage strategy being promoted this year involves buying fixed income securities while hedging with other financial instruments. The model generated a near 10 per cent return in the first six months alone, and is gaining traction among institutional clients such as insurers, Xu said.

Shanghai Minghong Investment Management Co told a recent roadshow, that by shorting index futures while buying a select group of stocks expected to outperform the index, its "market neutral" funds benefited from the share tumble triggered by Trump's tariff threats against China.

"We like market slumps ...the more emotional, the more chaotic the market is, the easier we generate alpha," said Xu Shijun, managing director at Shanghai Minghong.

In a further sign that China has become more accepting of funds with quantitative strategies, global hedge fund managers Bridgewater Associates LP and Winton Group Ltd have had their applications to launch products in China approved, registration notices last week showed.