Hedge Fund Cuts China Stocks to Zero in Year Worse Than 2008


(Bloomberg) — As China’s markets gyrate following Covid outbreaks and Russia’s invasion of Ukraine, one of the nation’s best-performing macro hedge funds is bracing for more pain.

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Shanghai Banxia Investment Management Center, which topped local rankings in 2020, has cut its stock exposure to zero in anticipation of a worsening economy and further declines in equities, founder Li Bei said. 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” when, even during the global financial crisis, holding government bonds could still be a winning strategy, Li said in an interview this month. “It’s now very difficult to find a place where they can make money.”

Unpredictable events like the war in Ukraine and the rapid spread of the omicron variant have blindsided China’s money managers best trained to capture opportunities across asset classes. Macro funds, which often trade in equity, bond and commodity markets, averaged a 7.4% loss 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 managing more than 10 billion yuan, apologized to investors and cut management fees this month after steep losses.

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

While Li said zero stock exposure is nothing unprecedented in her career as a macro manager, such a stance contrasts with peers that have been buying stocks, especially after Vice Premier Liu He’s pledge of support spurred a rally in March that’s since lost steam. Top quantitative funds also said their stock positions remained full during the declines, with some buying the dip.

“People are a bit too optimistic,” Li said by phone during a citywide lockdown.

The highly contagious omicron means that China’s Covid Zero stance requires Shanghai citizens “to make sacrifice, the economy to experience a bigger impact, and more listed companies to also suffer certain losses,” she wrote in a recent WeChat article. Fund managers in the city, who have to worry about economic fluctuations while coping with Covid tests and searching for food, “are indeed exhausted,” she added.

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

While the possibility of more and prolonged lockdowns threatens to slow the economy further, room to stimulate growth is constrained by high commodity prices and a shrinking interest-rate spread with the U.S. as the Federal Reserve speeds up hikes, Li said. Adding leverage is hardly a feasible option because local governments’ debts are already high and households’ desire to borrow mortgages has weakened, she said.

Investors have resumed selling Chinese stocks after last month’s vow to stabilize markets 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 cutting interest rates.

The benchmark CSI 300 Index slumped as much as 2.7% Monday, erasing the rally since mid-March as news that lockdowns were spreading to Beijing sent stocks, commodities and the yuan tumbling.

Li is betting the central bank will have to start cutting rates later in the year — probably after commodity prices subside — boosting bonds. “Otherwise there’s no way out,” she said, adding she’s put most of Banxia’s money in government notes, especially those with tenures not longer than five years.

Stocks will probably fall further as the economy and earnings disappoint, before rising on lower borrowing costs and an improved outlook, she said. Banxia still has about 10% of its money in equity positions that are fully hedged by index put options.

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

(Updates with stocks slump and Beijing lockdowns in 13th paragraph)

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