Home Hedge Funds Hedge fund stars who got China wrong are paying a big price

Hedge fund stars who got China wrong are paying a big price

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SHANGHAI – For veteran hedge fund investor Chua Soon Hock, 2024 was supposed to herald a multi-year rise in Chinese stocks and the opportunity of a lifetime. Instead, his fund’s sudden demise sends a warning to fellow China bulls: Stick to your guns at your peril.

Mr Chua’s Asia Genesis Asset Management told investors this week the US$330 million (S$443 million) fund would close after it was badly burned by wrong-way bets on Japan and by falling Chinese markets that he largely blamed on inaction by policymakers, including President Xi Jinping.

“I am writing to you with a heavy heart and utmost regret,” Mr Chua said in a letter to clients, saying their cash would be returned after an almost 19 per cent plunge in January. “My confidence as a trader is lost.”

Mr Chua’s plight shows how even the most experienced fund managers have been ensnared by a China market meltdown exacerbated by Beijing’s limited policy support.

Ms Li Bei, a long-time China hedge fund bull, admitted to mistakes after suffering the worst losses of her career, while global investment firm T. Rowe Price Group has seen the value of its China holdings fall by 80 per cent over years from its peak.

“All the evidence I’m seeing is that the economic data is a lot weaker than I thought, than anyone thought,” said Mr Justin Thomson, head of international equity at Baltimore-based T. Rowe Price. “You have had your confidence tested harder and for longer than before.”

China’s benchmark CSI 300 Index hit a five-year low on Jan 22 and the prolonged slump has pushed mutual fund closures to a five-year high, in another sign of waning investor confidence.

Though reports of a US$278 billion rescue package lifted shares briefly on Jan 23, many remain sceptical it is enough to end the rout.

China’s market is facing “a serious lack of confidence”, with some investors worrying about the possibility of a recession, according to Shanghai Yunhan Asset Management president Zhang Wenchao, whose fund manages about 700 million yuan (S$133 million).

When Mr Zhang tried to buy the dip last week, he was quickly forced to sell to cut his losses. He has since dumped all stock holdings.

“It was so scary – don’t bottom fish,” Mr Zhang said, adding that investors’ hope now hinges on policy support rather than fundamentals or sentiment. “Stock valuations certainly look good at current levels, but we may not be at the real bottom yet.”

Even one of China’s best-performing macro hedge funds has struggled.

Shanghai Banxia Investment Management Centre’s Ms Li, who manages more than 10 billion yuan, predicted a bull market in October 2022, betting on a rebound in corporate profits and the property sector.

In 2023 her flagship fund plunged almost 15 per cent – the first annual loss in at least six years, according to the firm’s December investor letter seen by Bloomberg.

The maximum drawdown, or decline, was 25 per cent from its peak in the middle of 2023, the worst drop in her career.

In all, more than US$6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since a peak reached in 2021.

Meanwhile, Kamet Capital Partners’ chief executive Kerry Goh, who still considers himself a long-term China bull, has reduced his China weighting after steep market losses in 2023.

“We were wrong on the momentum last year,” he said, adding that its equity allocation to China has fallen to 20 per cent, from more than 30 per cent in the first quarter of 2023.

He notes that long-only funds sold billions of dollars of Chinese stocks in 2023, and they continue to sell.

For investors like Mr Luca Castoldi at Reyl Intesa Sanpaolo in Singapore, fundamental analysis is becoming less effective, with so much pessimism and doubts about government support.

Investors do not care about China any more, and those that do not have to invest there have already pulled out, he said.

Ms Castoldi, who is now trading more on technical indicators and recently turned neutral on China stocks from underweight, said: “I cannot use the same metrics that we used before. You never know where is the floor.”

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