Chinese-style hedge funds lure top managers

Date: Tuesday, January 29, 2008
Author: Charlie Zhu, Reuters.com

SHANGHAI, Jan 29 (Reuters) - After he resigned as chief investment officer of JPMorgan's China fund venture last August, Lu Jun was inundated with offers of senior posts at other asset management firms.

But Lu, widely known in the country's 3.2 trillion yuan ($445 billion) mutual fund industry for his stock-picking skills and aggressive trading style, turned them down for his dream job: running China's version of a hedge fund.

"I had always hoped to have my own investment company. Chinese financial firms do not value their staff as much as Western firms do," the 35-year-old Lu told Reuters at his office in a brand-new Shanghai skyscraper.

Lu's move is the latest in a series of defections by mutual fund managers to China's "private investment fund" industry.

The industry plays the same role as hedge funds do abroad, investing big sums of money for wealthy Chinese clients in a wide range of markets and instruments within the country.

The Chinese funds are still a shadow of the Western hedge funds, which routinely throw billions of dollars around global markets, but China's economic boom, financial liberalisation and its growing ranks of dollar millionaires could eventually make them just as influential.

"China's wealth is growing rapidly, and nearly 30 years of economic reform and development have created many companies which are worth investing in. People are calling for more fund managers like us," said James Zhong, chairman and chief executive officer of Shenzhen Eastern Bay Investment Management Co Ltd, a large private investment fund based in the city of Shenzhen.

"If the government relaxes its restrictions, I would say the sky is the limit for the future of the industry," Zhong, whose company manages over 1 billion yuan, told Reuters by telephone.

Although the Chinese government does not regard the private funds as illegal, they are not officially recognised as investment funds, which makes it harder to operate them.

Unlike their overseas peers, they are barred from issuing shares by themselves to create pools of investor money. That means many private fund managers have the complex task of operating dozens of individual trading accounts held by clients.

Capital controls and other curbs on financial investment generally block the funds from moving money abroad, while underdeveloped markets limit their activities at home -- for example, China still has no domestic market in equity futures. Nevertheless, the industry is now estimated to manage hundreds of billions of yuan.

FIERCE COMPETITION

Lu's new firm, Winswear Capital Management -- so-called because he swears he will win in the market -- is preparing to launch a 300 million yuan securities investment fund.

Lu, with a master's degree in business from China's Wuhan University, also plans to launch a hedge fund in Singapore this year, raising $50 million initially from overseas Chinese and some European investors. It will focus on foreign-listed Chinese equities, shorting as well as buying them.

The number of Chinese millionaires -- people with over $1 million in financial assets, excluding their home -- rose 7.8 percent in 2006 to an estimated 345,000, according to a study by Merrill Lynch and Capgemini.

That does not guarantee smooth sailing for private funds such as Winswear, which charge performance fees of up to 20 percent.

Six months ago, investors might have been happy to overlook the charge. But the Chinese stock market has been hit hard by sliding foreign markets, tightening monetary policy and a heavy supply of new shares, with the main Shanghai stock index .SSEC tumbling 28 percent from a record high hit in October.

Private fund managers are also coming under heavy pressure from clients who demand returns above those of mutual funds.

At least one firm, Chi Zi Zhi Xin or "Overseas Compatriots", closed its funds a month ago after they underperformed, state media and an industry source with ties to the company said.

And competition is growing. Beijing recently selected mutual fund firms to set up hedge fund-type accounts for the super-rich or institutional investors.

Chinese and Western banks, including BNP Paribas (BNPP.PA: Quote, Profile, Research) and Citigroup (C.N: Quote, Profile, Research), are also stepping up efforts to woo super-rich clients to their private banking units.

A lack of financial knowledge among some of China's newly rich can make it even harder to sell sophisticated services.

Jin Zong, a Shanghai millionaire who co-owns a property developer and has never bought stocks or bonds, recently asked a Reuters reporter where he should put his retirement money.

"Shall I leave it to private banks or those mutual funds?" Jin asked.

But Lu is confident that China's wealth management market is potentially big enough to accommodate specialist private funds.

"There are still many investors who need our service. "I'm not afraid of competing with mutual funds in terms of returns."

Lu sees opportunities in small-cap Chinese stocks and Shanghai's newly launched gold futures <0#SHAU:> this year.

Because of the operating restrictions, Lu is launching his local fund with a trust firm, to which Winswear will act as investment consultant -- an arrangement used by many other firms.

"That means we share performance fees with trusts and pay more tax. But we have no other choice," Lu said. ($1 = 7.2 yuan) (Editing by Andrew Torchia and John Chalmers)