Home Hedge Funds Hedge Funds Spawned by Hillhouse Burned in China Tech Crash

Hedge Funds Spawned by Hillhouse Burned in China Tech Crash


(Bloomberg) — For years, it’s been one of the best calling cards that hedge fund startups in Asia could ask for: getting support from billionaire Zhang Lei or gaining experience at his Hillhouse Capital Group.

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After leveraging that Hillhouse pedigree to raise a combined $20 billion, the offshoot funds are losing some of their luster. Most have posted double-digit declines this year on the same Chinese tech, consumer and health-care sectors that Hillhouse itself backed to mint so many millionaires.

None of the nine Hillhouse next-generation funds Bloomberg tracked has been spared. Franchise Capital Management lost two-thirds of its value in the 14 months to April, according to a newsletter sent to investors. Brilliance Asset Management’s flagship fund dropped 27% in the first four months of 2022, according to people familiar with the matter, while a retail version dropped 47% from a February 2021 peak to June 2. CoreView Capital Management and Snow Lake Capital also had losses.

While most funds with sizable China exposure have suffered, the Hillhouse offshoots have been particularly hard hit. Several of them easily exceeded the 9% drop in a Eurekahedge index for the first four months of the year. That same gauge that tracks Asia stock hedge funds eked out a gain in 2021, unlike half of the Hillhouse progeny.

“Some hedge funds were early to grasp the opportunities in tech stocks — unfortunately, many held on for far too long when fortunes turned against them,” said Andrew Beer, founder of New York-based Dynamic Beta Investments, which seeks to replicate hedge fund returns. “The shocking magnitude of drawdowns among some stock-picking hedge funds calls into question whether they were ever hedged at all.”

The losses are a painful reversal for the funds, which have had success in recent years in part by focusing on some of the same industries as Hillhouse, the investment giant Zhang founded 17 years ago with $30 million from Yale University’s endowment fund.

Thanks to winning bets on firms like JD.com Inc., Meituan, Sea Ltd., Tencent Holdings Ltd. and Zoom Video Communications Inc., Hillhouse — named after a street on the Yale campus — became an investment behemoth with $106 billion in assets at the end of 2021. That makes it one of the biggest asset managers in Asia.

Given Zhang’s track record, a Hillhouse connection helped hedge fund entrepreneurs start their own firms, much like the Tiger Cubs in the US, whose founders cut their teeth at Julian Robertson’s Tiger Management. (The Tiger Cubs are also getting whacked this year by the tech plunge.)

Like Hillhouse, the funds know their industries inside-out, according to an investor with knowledge of most of them. When confronted with corrections in core positions, they have tended to dig in or double down rather than cut losses and flee like more active-trading rivals.

The funds often share Hillhouse’s fondness for long-term, gutsy bets, and it’s not unusual for them to select stocks like JD.com and GDS Holdings Ltd. that have counted Hillhouse as a top shareholder, according to regulatory filings since June 2021. Until recently, that’s been a winning formula, with some of the acolyte funds posting returns as high as 203% in better years.

That strategy is now being put to the test by policy shifts. Chinese stocks in industries from e-commerce to tutoring have been hammered by regulatory tightening, while the US has threatened to delist Chinese companies over access to audits. These moves, combined with a global tech rout, have contributed to a 67% drop in the Nasdaq Golden Dragon China Index since February 2021. The index has rebounded from a nine-year low in March, providing potential relief to the funds.

China Bets

The Hillhouse offsprings’ bets such as TAL Education Group, New Oriental Education & Technology Group Inc. and Chinese cosmetics company Yatsen Holding Ltd. have lost more than 90% of their value in the past 16 months, among the biggest decliners of the Golden Dragon gauge.

“Hedge fund managers are paid a ton precisely because investors expect them to step off the tracks before the train hits,” said Beer. “Here, it looks like a whole group of funds was convinced trains were obsolete.”

Firms across the region are feeling the pinch. Net outflows for Asia hedge funds excluding Japan were about $3.6 billion in the first four months of the year, compared with net inflows of $8.1 billion for all of 2021, according to figures from Eurekahedge.

While not immune to the carnage, Hillhouse has invested in a wider array of countries and industries than its progeny, backing global firms like Salesforce Inc. and Mondelez International Inc. The fund has posted annualized returns of 28% before fees from 2015 to the end of 2021, according to a person familiar with the matter.

Still, assets at its $62.7 billion HHLR Advisors Ltd. unit — the public investment arm — declined 9% last year, in part due to investment losses. And some of its biggest holdings have seen steep declines this year. Health-care firm BeiGene Ltd. is down 46%, while Doordash Inc. has dropped 58% to June 10. Hillhouse began investing in BeiGene before it went public, and the shares are still well above the IPO price.

Here are details on returns and snapshots of some of the bigger funds:


Founder Simon Wang, a former Hillhouse analyst specializing in finance and real estate, has focused his $900 million hedge fund on technology, consumer and healthcare, according to an April newsletter seen by Bloomberg News.

Franchise has been one of the top holders of Chinese education company Gaotu Techedu Inc. Even after the July clampdown by Beijing, Franchise added to its Gaotu position into the fourth quarter, before starting to cut it early in 2022, according to Bloomberg data based on regulatory filings.

More than half of Franchise’s 24 US-listed stocks as of March 31 have lost 40% or more of their value this year, according to a regulatory filing. They included e-commerce giants Sea, Shopify Inc., and Bilibili Inc., the live-streaming platform.

Wang blamed the deep losses on the “huge” correction in growth stocks, especially the fund’s key US-listed positions, poor “exposure control” and “lack of attention to business, organization and valuation,” according to the newsletter.

Still, investors who have stayed with Franchise from inception in 2015 have more than doubled their money even after the recent hemorrhage.


Former Hillhouse analyst Shi Lin struck out on his own in 2013 with $5 million and three analysts, eventually becoming a $6.1 billion firm with offices in Hong Kong and Beijing, according to a profile for a UBS Group AG event this year.

Brilliance’s flagship fund plunged last July, prompting an apology from Shi for failing to quickly grasp the impact of Beijing’s education reform. While he remained bullish on New Oriental and TAL Education at that time, Brilliance no longer held those stocks by the third quarter, based on filings.

The Brilliance China Core Long Short Fund, a retail version of its hedge fund, dropped 26% this year through June 2, according to Bloomberg data. Assets tumbled to less than $120 million from a high of $676 million.

Brilliance pivoted last year to domestic stocks, which accounted for 80% of its bullish holdings. Still, the majority of the shares held at year end by a vehicle that includes the Brilliance retail fund have declined more than 20% in 2022. China’s main equity gauge is off 15% as of June 13.

Snow Lake

Sean Ma set up Snow Lake in 2009 with backing from Zhang, and oversaw $2 billion in hedge and long-only Asia and China funds as of August. It announced in November it was shuttering its Asia fund that lost 31% in the first nine months of the year after two managers left.

A wrong bet on MGM China Holdings Ltd. was the key driver. The firm built an 8% stake early last year, hoping to push the Macau casino’s parent to sell shares to a Chinese company. Instead, the government’s proposal to increase oversight of the industry sent the stock into a tailspin. It’s down about 70% from a March 2021 high.

A strong fourth-quarter rebound helped its China hedge fund narrow the annual loss to about 25%. This year, the fund is down mid-single-digits through early June, said a person with knowledge of the matter. Zhang no longer has a stake in Snow Lake.


Founder Vincent Gao spent more than 10 years at Hillhouse, specializing in consumer technology companies. As one of the nearly dozen Hillhouse investment partners at the time of his departure, Gao’s hedge fund was one of the most anticipated startups last year, attracting some $3 billion in gross assets. That’s no small feat considering the average hedge fund in Asia runs $142 million, according to Bloomberg data.

CoreView began trading in February 2021 amid a perfect storm for Chinese technology companies. The firm lost money last year and this year, said a person with knowledge of the matter. CoreView doubled down on Chinese online property platform KE Holdings Inc., which by March represented nearly 43% of its reported US holdings. The stock has tumbled 28% this year.


Gravity finally caught up with Aspex Management. The Zhang-backed firm led by Hermes Li, the former head of Asia equities at Och-Ziff Capital Management, lost 15% in the first four months of 2022, people familiar said. That followed returns ranging from 31% to more than 100% in each of its first three years, as assets swelled to $8 billion.

Its US holdings — worth $2.3 billion at the end of March — were much to blame. Aspex is a top shareholder of GDS, with a stake worth more than $300 million. GDS is down about 70% from its February 2021 high to Monday.

Aspex has fared better than some of the other funds given its more balanced investments across Asia and in a broader set of industries.

Brilliance, Franchise and Octagon Capital representatives didn’t reply to several emails seeking comment. Hillhouse, AIHC Capital Management, Aspex, AnglePoint Asset Management, CoreView, Snow Lake and Toroa Management declined to comment.

(Updates returns on second chart)

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