Hedge Fund lowers China’s shares to zero this year worse than 2008

(Bloomberg) – As China’s markets fluctuate following the Covid eruption and Russia’s invasion of Ukraine, one of the country’s top performing macro hedge funds is preparing for more pain.

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Shanghai Banxia Investment Management Center, which topped local rankings in 2020, has reduced its equity exposure to zero in anticipation of a deteriorating economy and further decline in equities, said founder Li Bei. The fund, which manages more than 5 billion yuan ($ 785 million), has also closed almost all short positions in commodities after rising prices led to losses.

“This year could be even worse for fund managers than 2008,” where, even during the global financial crisis, holding government bonds could still be a winning strategy, Li said in an interview this month. “It’s very difficult now to find a place where they can make money.”

Unpredictable events such as the war in Ukraine and the rapid spread of the omicron variant have dazzled China’s money managers, who are best trained to capture opportunities across asset classes. Macro funds, which often trade in stock, bond and commodity markets, averaged a loss of 7.4% in the first quarter, the worst performance among eight hedge fund strategies, according to Shenzhen PaiPaiWang Investment & Management Co.

DH Fund Management, a macro-fund that manages more than 10 billion yuan, apologized to investors and reduced management fees this month after heavy losses.

Li’s low-volatility Banxia Macro Fund, which rose 60% last year, lost about 7% in the first quarter. It achieved a 258% increase in 2020 after dropping a strategy similar to Bridgewater Associates. Bridgewater’s onshore China funds rose 4.8% last quarter, according to PaiPaiWang.

While Li said zero stock exposure is unprecedented in her career as a macromanager, such an attitude contrasts with peers who have bought shares, especially after Deputy Prime Minister Liu He’s pledge of support spurred a rally in March that has since has been lost. Top quantitative funds also said their stock positions remained full during the falls, with some buying the dive.

“People are a little too optimistic,” Li said by telephone during a nationwide shutdown.

The highly contagious omicron means that China’s Covid Zero stance requires that Shanghai citizens “sacrifice themselves, that the economy experiences a greater impact, and that more listed companies also suffer certain losses,” she wrote in a recent WeChat article. Fund managers in the city who have to worry about financial fluctuations while handling Covid tests and looking for food, “are really exhausted,” she added.

Shanghai hosts 2,245 hedge funds, about a quarter of the country’s total, according to PaiPaiWang data.

While the possibility of more and longer-term shutdowns threatens to slow the economy further, room to stimulate growth is limited by high commodity prices and a declining interest rate spread with the US as the Federal Reserve accelerates interest rate hikes, Li said. Adding leverage is hardly a feasible option because local government debt is already high and households’ willingness to borrow mortgages has weakened, she said.

Investors have resumed the sale of Chinese shares, after last month’s promise to stabilize the markets has yielded few concrete measures so far. The People’s Bank of China this month lowered the amount of cash lenders set aside as reserves, but refrained from lowering interest rates.

The benchmark CSI 300 index fell as much as 2.7% on Monday, erasing the rise since mid-March when news of lockdowns spreading to Beijing caused stocks, commodities and the yuan to fall.

Li is betting that the central bank will have to start lowering interest rates later in the year – presumably after commodity prices have fallen – boosting bonds. “Otherwise, there is no way around it,” she said, adding that she has put most of Banxia’s money in banknotes, especially those with appointments of no more than five years.

Shares are likely to fall further as the economy and earnings disappoint before rising due to lower borrowing costs and improved prospects, she said. Banxia still has about 10% of its money in stock positions that are fully hedged by index-put options.

“I hope I can still make money this year,” Li said. “But certainly not as much as in the last few years.”

(Stock decline updates and Beijing lockdowns in Section 13)

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