Foreign hedge funds scent huge opportunities in China

Foreign hedge funds are looking to leverage on China's favorable outbound investment policies to raise more funds from wealthy Chinese individuals planning to invest abroad.

Indications that foreign hedge fund managers are stepping up their game were evident from the keen interest shown during the second round of the qualified domestic limited partnership program in Shanghai. The QDLP program allows high net-worth Chinese individuals to invest in overseas markets via foreign hedge funds. The first round of the program was conducted in 2013.

Such interest, however, is not confined to Shanghai alone. Other provinces and regions are also stepping up their game to attract foreign hedge fund managers. In Shenzhen, trials are underway for the qualified domestic investment enterprise program, which is similar to the QDLP but more flexible on investment areas. Zhejiang province is building a hedge fund township in Hangzhou to attract hedge fund managers at home and abroad.

Man Group Plc, the United Kingdom-based hedge fund, is one of the applicants in the second round of the QDLP program. It was also one of the six foreign hedge funds to get the nod in the first round of the QDLP program each to raise $50 million in Chinese currency.

The other five funds were Winton Capital Management, Oaktree Capital Management, Citadel, Och-Ziff Capital Management Group and Canyon Partners.

"China is a huge market and participating in the QDLP program is an opportunity for foreign hedge funds to build a brand and a presence in the rapidly growing domestic capital base," said Li Yifei, chairman of Man Group China.

Li said that the proactive measures taken by the government have instilled confidence in the company's long-term view on China.

There are about 1 million high net-worth individuals, each with investable assets of more than 10 million yuan ($1.6 million) till date in China and the investable funds of Chinese people totaled 112 trillion yuan, said a recent report published by China Merchants Bank and Bain & Co.

By the end of last year, the pension balance totaled 3.1 trillion yuan and enterprise annuity balance totaled 760 billion yuan, according to Asset Management Association of China.

According to the association, there was no market-oriented investment management for most of the Chinese pension funds. This was primarily due to system limitations and the stipulation that pension funds need steady investment return. Hedge funds can be a good option for portfolio management, it said.

US-based investment management firm Spring Mountain Capital is launching a fund of funds in Asia targeting Chinese investors. The fund plans to generate investment for a group of global hedge funds selected by Spring Mountain.

"We are bullish on Chinese market prospects as the investable funds of Chinese people are growing steadily. The growing emphasis on wealth management provides us with a huge opportunity," said William Xin, an executive partner of Spring Mountain who leads the Chinese business.

Li Xianghui, general manager for China at Canyon Partners, a United States-based global alternative asset managing company, said his firm is paying more attention to corporate strategy in China.

"The favorable government policies will help us expand business, strengthen communications with clients and tailor suitable investment strategies for them," said Li.

However, there are still some challenges that foreign hedge fund managers need to deal with. Xie Qing, a partner at the Beijing-based Junhe Law Firm, said during the 2015 Hedge Fund West Lake Summit in Hangzhou that it was important for foreign hedge fund managers to find the right partners in China. She said foreign hedge fund managers should also familiarize themselves with Chinese regulations and distribution channels.