Hedge funds ratchet up their focus on China

China is making its presence felt by the hedge-fund industry, replacing London as the most popular base for Asia-focused managers and replacing Japan as the focus for Asian hedge funds.

Data provider Hedge Fund Research said in a recent report on the $68.2 billion Asian hedge-fund industry that 24% of Asia-focused hedge funds now are located in China, a rise of more than 5% from a year ago.

"Investors looking to access growth this year and in coming years will be allocating to Asia-focused hedge funds," said Kenneth Heinz, HFR president.

HFR added: "The number of Asia-focused funds based in China has surpassed the number headquartered in the U.K. and is approaching the number of Asia-focused funds located in the U.S."

Mark White, general manager of Castle Alternative Invest, a multistrategy listed fund of funds, said that China's growing popularity was largely thanks to funds opening in greater China, namely Hong Kong. He said gaining licenses to manage one on the mainland is difficult, so managers are registering headquarters in Hong Kong and opening research branches on the mainland.

"The trend is gradually for them to move toward most of them being based in Asia," he said. However, "London has been surprisingly successul until very recently in terms of retaining the numbers here."

Meanwhile, China also showed its growing regional dominance according to statistics from LGT Capital Partners, a large London investor that numbers Asia-focused hedge funds among its investments.

LGT found that, since the end of last year, more Asia-centric hedge funds have focused on China than on Japan.

"Considering Japan is the second-largest economy in the world, and has had a free market for five decades, we wouldn't have expected China to overtake so quickly," he said. He added that China-focused hedge funds have been around for 10 years at most.

Asia-focused hedge funds had their strongest performance in nearly a decade during the second quarter, said HFR, gaining 18.9%, or $6.8 billion.

Funds focusing on China made 19.8%, HFR said. Their 69% return over three years broadly resembled 77% from Chinese stocks.

Melvyn Teo, associate professor of finance at Singapore University, found in research published earlier this year that Asian-focused hedge funds with a local presence beat rivals without such a presence by 3.7% a year, on average, partly because managers based in Asia could exploit local information more rapidly.

-Wall Street Journal