UBS hedge fund may offer clients direct access to China strategy

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NEW YORK: A UBS Group AG hedge fund unit is considering giving investors direct access to its China strategy, after it navigated through a raft of regulatory interventions that threw doubt on the country’s investment potential.

The strategy has booked double-digit gains this year, with “very positive” returns in both July and August, said Kevin Russell, New York-based chief investment officer of the US$9.6bil (RM39.8bil) UBS O’Connor unit.

He declined to give precise performance numbers or say whether it’s creating a separate China fund, citing regulatory restrictions.

Clients can only access the China strategy through UBS O’Connor’s US$3.2bil (RM13.3bil) multi-strategy investment pool at the moment.

China accounts for 13% of its gross assets –the combination of bullish and bearish investments – and has contributed just over 15% of its “top decile” return this year, he added.

“Global investors continue to be underweight China,” Russell said in a telephone interview.

“They continue to think that they need to be invested in China, because it’s very compelling from the growth and liquidity perspectives. But they are looking for safer ways, more conservative ways to invest in China.”

China’s widening regulatory actions have clouded the prospects of erstwhile investor darlings in industries including e-commerce, ride-hailing and after-school tutoring.

The Hang Seng China Enterprises Index is the second-worst performer among major stock indices tracked by Bloomberg globally this year, after the tightening prompted investors to slash holdings.

Some of the most seasoned regional hedge fund managers are licking their wounds after double-digit losses in July, the worst month for China stock-pickers since March 2020, according to data from Goldman Sachs Group Inc and Eurekahedge Pte.

The market volatility has widened the performance differentials of Chinese stocks, providing more opportunities for so-called relative-value traders like O’Connor that seek to profit from pricing gaps of related securities.

“Despite the market being one of the worst performing markets in the world, despite some of the regulation and intervention surprising, there have been terrific opportunities for relative-value investors,” Russell said.

John Bradshaw runs O’Connor’s Asia business, which includes an eight-person China team in Singapore, Hong Kong and Shanghai led by Tan Jia, a former employee of Och-Ziff Capital Management.

China’s share of the O’Connor multistrategy pool’s gross assets rose from 12% in January to the highest level this year.

Half of the China investments are in yuan-denominated class-A shares listed on the mainland.

A previous plan to hike China investment to 18% was frustrated by a slower-than-expected increase in the availability of A-shares for international investors to borrow, Russell said.

O’Connor isn’t alone in seeing more trading opportunities during the Asian market turmoil.

Hong Kong-based Polymer Capital Management is reopening its US$2bil (RM8.3bil) hedge fund for more investor capital in December.

O’Connor began to reduce or sell out of large Chinese technology companies in the fourth quarter of 2020, after spotting signs of tightening regulation over the use and monetisation of consumer data. By early spring, it was underweight or short those companies.

Another very profitable trade has been to short after-school tutoring companies since early this year, after China’s leadership listed the expense of child-rearing and education as a social concern, Russell said. — Bloomberg