US hedge funds far outperformed local rivals in China in 2023

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Assets managed by the Chinese operations of Bridgewater and Two Sigma surged as the US hedge funds outperformed their local peers during the market turbulence of last year.

Bridgewater China Investment Management, the local arm of the world’s largest hedge fund, quadrupled its assets under management to more than Rmb40bn ($5.6bn) at the end of last year from two years ago, while Two Sigma China almost doubled its assets over the same period, according to people close to the companies.

The influx of local investors came as the global hedge funds reported double-digit returns in one of the world’s worst-performing markets while local asset managers struggled to make ends meet.

Bridgewater’s flagship All Weather Strategy China Private Investment Fund, which targets wealthy individuals with a minimum investment of Rmb5mn ($700,000), yielded 10.2 per cent last year, according to a distributor of the fund. People close to Two Sigma said the quantitative trading giant’s three China funds reported a more than 16 per cent return over the same period.

In contrast, the benchmark CSI 300 index fell 11.7 per cent in 2023 as China’s post-pandemic economic recovery struggled to gain traction following an unprecedented real estate meltdown.

While many Chinese investment firms sought to emulate Bridgewater’s success by tapping alternative asset classes such as commodities and derivatives, they had limited success. Public records show China’s 771 locally owned multi-strategy hedge funds generated an average return of 2.8 per cent last year.

The outperformance of the likes of Bridgewater and Two Sigma in the Chinese market highlights the potential for global asset managers to profit from the world’s second-largest economy despite its lukewarm growth outlook and geopolitical tensions between Beijing and western capitals.

“Global hedge funds know how to navigate a bear market as they have been through numerous ups and downs,” said Zhang Zhongyu, vice-president at Shenzhen Rongzhi Investment Consultant, which reviews local hedge funds. “Most Chinese funds only know how to make money in a bull market.”

In a roadshow this month with Chinese investors, Bridgewater said it beat the local market by diversifying into commodities and bonds whose resilient performance helped offset losses in its stock portfolio, according to minutes of the meeting seen by the Financial Times.

Public records show multiple Shanghai- and Shenzhen-listed gold ETFs listed Bridgewater All Weather Strategy China Private Investment Fund as one of the top 10 investors in the first half of last year.

A BCIM executive said in the roadshow that the fund’s commodities investment, led by gold ETFs that generated double-digit returns last year against a slump in the equity market, was the biggest contributor to its overall performance.

In the meantime, most local asset managers, including industry heavyweights once critical of their western peers, have suffered heavily from the market meltdown. Li Bei’s flagship Banxia Macro Fund plunged 20.4 per cent over the past 12 months. The Shanghai-based hedge fund manager is known for her successful bets on commodities in the wake of the coronavirus pandemic outbreak and her dismissal last August of foreign investors as “a bunch of aimless flies” following a sharp sell-off.

Bridgewater China’s strong performance has prompted the fund to expand its footprint in one of the world’s largest wealth management markets just as other US asset management giants such as Vanguard are walking away.

Public records show BCIM issued a record 56 investment products last year, up from 30 in 2022 and one in 2018, when the firm began business in China.

An official at China Merchants Securities, which handles sales of the All Weather Strategy funds, said demand was “so strong” that only existing clients could make additional purchases.

“It is difficult to find an investment product that did well in a bad market,” said the official.

Despite the headway made by hedge fund giants, traditional US asset managers had a hard time figuring out the Chinese market. Index fund manager Vanguard closed its China office last November after its partnership with Jack Ma’s Ant Group fell apart. BlackRock China made losses on all of its eight stock-focused funds last year as the world’s largest asset manager struggled to profit from a market driven by the whims of government policy.

“Certain funds that have a lot of money and are fairly aggressive can go in and try to make some money within the China market on a small scale,” said Andrew Collier, an analyst at GlobalSource Partners who advises US investors on Chinese investment. “That doesn’t mean other [US] funds with a more established approach could follow suit.”