Shanghai free-trade zone lifts expectations

The fact that six notable international hedge fund managers are soon to market investments to wealthy locals in Shanghai appears to be a lucky omen.

The decision by regulators in China's new free-trade zone to give quotas of $50m each to Citadel, Man Group, Oaktree, Och-Ziff, Winton Capital and Canyon Partners as part of a pilot investment programme offers hope to asset managers the world over. Perhaps, the thinking goes, the task of curating a business in the world's most populous country will not be nearly as laborious in future.

Indeed, as the year of the snake draws to a close and the year of the horse approaches, China watchers hold high expectations that the country's qualified domestic limited partner programme (QDLP for short) will be extended to include a range of other foreign fund houses so long as Beijing deems the initial efforts a success.

"This is an experiment," says Pierre Lagrange, co-founder of GLG and chairman of Man Group Asia. He was deeply involved in the hedge fund's efforts to persuade Shanghai's regulators to grant its license, which kicked off in earnest two years ago.

"We look to make it a success. The logic is there is no reason why this should be a one-off," he says.

A number of foreign fund managers are said to be lobbying regulators in Shanghai aggressively for QDLP licenses. There is also talk of a similar programme being launched in Shenzhen's Qianhai area, which now positions itself as a hub for alternative investments.

"A lot of managers are queueing at the door," says Yoon Ng, Asia head at Cerulli Associates, a fund management research group. "Regulators there can give the licenses to whom they want to ... They tend to roll things out in stages. They start with one city first and then if it goes well, they extend the effort to other markets."

A clutch of reasons explain why Chinese authorities are keen to see QDLP flourish. At the broadest level, the programme represents a fledgling step in opening China's capital account and breaking down the blockades that divide the country from global markets.

It also gives Chinese institutions the chance to offer exposure to alternative investment strategies, still largely off limits to investors in the country, from arbitrage and options to shorting.

"There are no real offerings of hedge funds domestically, with the exception of vehicles with limited capacity," says Mr Lagrange. "This offers a way for the government to allow people to invest in uncorrelated strategies."

Another motivating factor driving the push to broaden the repertoire of investments on offer is that Beijing faces a pension funding gap of as much as Rmb18.3tn ($3.1tn), according to recent research. Industry watchers are quick to speculate that the shortfall might be addressed better if a range of alternative investments, throwing up higher yields, were added to the asset mix.

The size of the country's pension system is Rmb8.89tn ($1.14tn), with 52 global asset managers now looking after Chinese pension assets of Rmb445bn. This represents a relatively small proportion of the total value of the market, according to estimates from Z-Ben Advisors, a Shanghai-based investment consulting group. The enormity of the pension system creates opportunities for outsiders.

"We believe this number will grow much larger and the opportunity for global managers to run part of these pension assets will increase over the next five years," says Francois Guilloux, a director at Z-Ben Advisors.

Ακολουθήστε το Euro2day.gr στο Google News!Παρακολουθήστε τις εξελίξεις με την υπογραφη εγκυρότητας του Euro2day.gr

FOLLOW USΑκολουθήστε τη σελίδα του Euro2day.gr στο Linkedin

A further attraction for western fund managers, meanwhile, is that the QDLP programme scraps some of the burdens they presently face when setting up shop in the country.

"It has been very, very challenging for foreign managers to establish an onshore presence in China," says Ms Ng. "It's a very costly business. Many of the newer players in the market haven't done very well."

Many senior executives with western fund houses are frustrated with joint ventures that require them to limit their holding to a 49 per cent stake when partnering with a local company. The QDLP programme offers flexibility to western fund houses, giving them greater control over fund distribution.

Mr Lagrange reports that no decision has yet been made as to whether Man will partner with a local bank or brokerage house. "At this stage, we have no formal partnership. We are talking to banks and security houses that are interested. And we're not rejecting the idea of a formal partnership, but a joint effort can take a lot of different forms."

Spokesmen for the five other hedge funds taking part either declined to comment or could not be reached.

QDLP is the last of four main cross-border investment schemes that allow either mainlanders to invest outside China or foreigners to invest on the mainland.

The qualified foreign institutional investor (QFII) and the renminbi qualified foreign institutional investor programmes give quotas for foreign institutions to invest in China's markets, while the qualified domestic institutional investor (QDII) scheme gives local institutions quotas to invest outside China in equities and fixed-income products.

While the returns of QDII funds have outpaced the Chinese market in recent years, they struggle to attract assets, unable to salvage reputations that the global financial crisis damaged.

Whether the QDLP programme will also receive mixed reviews from Chinese investors remains uncertain. "It's too early to tell how much interest Chinese investors will show," says Misha Graboi, a hedge fund portfolio manager, based in Singapore, at the Pacific Alternative Asset Management Company.

© The Financial Times Limited 2013. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation