Hedge fund index dampens Chinese zeal for long-only bets

SHANGHAI: As Chinese individuals scramble into the country's boiling stock market through long-only mutual funds, a newly-launched fund index shows how investment marathoners with risk-hedging tools can win out in China's roller-coaster markets.

Yanlian China Hedged Fund Index, which tracks 50 Chinese investment funds with hedging strategies, generated an annualized return of 11.5% over the past five years, compared with an annualized loss of 4% for the CSI300 benchmark.

"I have witnessed several cycles of bull and bear markets," said Liu Wencai, founder of Shanghai-based risk-management consultancy D-Union, which launched the index.

"In every bull market, people rush in, only to be trapped when the market turns bearish," said Liu, who describes China's current bull as a liquidity-driven "water buffalo".

The CSI300 jumped to five-year highs this week, also boosted by government support, capital reform hopes and signs of economic recovery. BofA said investors poured the most cash into China funds since July 2015.

However, fears are growing of a repeat of the 2015-16 bubble that saw the benchmark Shanghai index fall more than 40% from its peak in just a few weeks.

A growing number of long-only mutual funds have started restricting inflows.

The Yanlian index, which tracks 20 mutual funds, and 30 private funds, could potentially provide a tool for investors seeking relatively stable returns in a low-yield environment.

The funds tracked by the index use derivatives such as stock index futures or options to hedge risks and iron out excessive fluctuations.

It could also help overseas investors navigate China's crowded fund market as regulators are expected soon to allow qualified foreign institutions to directly invest in local private securities funds.

Another impetus for risk-hedging is China's ongoing campaign to bar asset managers from guaranteeing to protect investors' principal.

"More and more people are paying attention to the concept of risk-hedging," said Li Lu, professor of finance at the Shanghai International Studies University. "More and more funds with hedging strategies are being born in China."