After coming off a muted 2016, hedge fund performance in 2017 has been holding close to their benchmarks if not exceeding them in many sub sectors. One such niche are those hedge funds investing in China A-Shares. The group 38 hedge funds that invest in premium stocks in the increasingly an increasingly capitalistic region of the world are dramatically outperforming their stock market benchmark year to date. The Eurekahedge China A-Share Investing Hedge Fund Index, for instance, is up a strong 10.33% year to date after posting sagging 2016 returns.
The strong returns come as the Shanghai A Shares Index of top stocks in the region is up only 2.89%. With hedge fund managers such as Kyle Bass loudly betting against China, this could be a case of what lasts longer the trader’s liquidity and patience or the government’s ability to maneuver to hold together the system despite high leverage levels?
Kyle Bass notes two stories told in China: one to the public, the other behind the scenes
Kyle Bass is waiting for China to implode. When the Texas-based hedge fund warned in May that “all hell is about to break loose” in the region, he was talking his book on a trade that isn’t so difficult to model on a probabilistic basis as it is on a timing basis.
Bass is concerned about China’s historically high leverage and thinks when the problem is finally recognized by the markets what could result is a 30% drop in the value of the yuan against the dollar.
“What the public narrative is and what they have been doing behind the scenes are two completely different stories,” Bass told Reuters. “China has been masterful controlling the public narrative. As a fiduciary, I have no idea how anyone can invest in China.”
But those hedge fund allocators who have been avoiding Chinese-focused hedge funds have missed gains in 2017, as have currency speculators betting against the yuan, which is up over 2% on the year relative to the US dollar.
China A-Share Investing Hedge Fund Index and those hedge funds investing in premium stocks witness a correlation divergence
With global hedge funds up a mere 3.25% year to date in 2017, double digit performance with the Eurekahedge China A-Share Investing Hedge Fund Index stands almost as a mocking the China implosion thesis.
While the government and its banks are acknowledged to be over leveraged, analysts have noted that there are numerous ploys the government can use to keep the staged leverage kabuki theater running. Jeffery Gundlach has noted the increasingly difficult task of timing a debt or leverage implosion, saying when it does come the crash will be sharp and swift.
But looking at the China A-Share Investing Hedge Fund Index, one might not know the trouble in paradise exists. Over two, three and five year periods, China A-Shares Investing hedge funds have posted lower annualized volatility relative to the underlying market benchmarks while often beating them in terms of absolute returns.
Eurkahedge observes that China A-Share investing hedge funds have largely delivered positive alpha over the 79 month period with an alpha of 0.41%. But getting deeper into the data, there are correlation statistics that point to alpha generation. “The 12 month rolling beta to the underlying Shanghai A Shares Index has in recent
“The 12 month rolling beta to the underlying Shanghai A Shares Index has in recent times trended lower, especially from the levels seen in end-2015,” the report noted. Such a divergence could be due to concentrated exposure to idiosyncratic issues and less overall exposure to the underlying Shanghai A Shares market, which at times lagged the larger and more liquid CSI 300 Index constituents, which are up 10.78% year to date.
“It would be interesting to see how directional exposure to A-shares, which rises during strong bull-market runs in Chinese equities plays out for the remainder of the year especially given MSCI mandate to include Chinese A-shares to its Emerging Markets Indices,” Eurekahedge opined, as volatility of the China focused hedge funds is nearly half of that of the major Chinese stock indices.
H/t Business Insider