By Aradhna Dayal
Last month, on my
way to Beijing and Shanghai to speak at a key global event, I
faced an unexpected hiccup. After waiting for seven hours on
the runway, we were informed that all flights to China had been
put on hold as Beijing closed off all landing slots. Whether it
was because of the VVIP movement due to a high-profile global
event taking place in China at that time or due to any other
reason, one thing was clear: the government influence on
anything and everything in this country is supreme.
However, when we did finally get to Beijing some 10 hours
later, the airport had made several arrangements to fast-track
the exit of the bleary-eyed passengers. Which confirms another
core belief about China - that there is tremendous foresight
and organisation in everything that the Chinese authorities
undertake. Little surprise, then, that during my time in China
I witnessed some of the most pioneering work and progressive
thinking that is going into the development of a world-class
hedge fund industry in the country.
During my trip, I had the privilege of having several
candid, though off the record, conversations with some of the
best brains in the country (both at the government and industry
level) that are working on ground-breaking initiatives such as
the QDLP programme. And it was clear that China is opening its
doors to foreign hedge funds as much to learn from them and
create its own international-calibre hedge fund industry
domestically, as to give them entry into one of the most
promising markets in the world.
Foreign managers may view QDLP as the next sluice gate,
allowing them for the first time to access the large capital
pool in the country and invest it overseas. But the Shanghai
government is looking at QDLP to bring experienced global hedge
fund managers on the ground, and create an ecosystem for
adequate skill and knowledge transfer, thus paving the way for
a viable and talented onshore hedge fund industry.
The Chinese regulators understand the value of imbibing best
global practices and key hedging skills from international
managers, and clearly want the local hedge fund managers to
understand concepts such as shorting, leveraging and other
fundamentals of hedge fund investing, before allowing a full
spectrum of hedge fund trading in the country.
Indeed the pace of regulatory easing has quickened in the
past few years, with the industry having seen more reforms (or
steps in that direction) in the past two years than in the past
decade. Short-selling and margin lending has begun on a limited
basis, the Shanghai government is working on the pilot QDLP
programme, and hedge funds may even be allowed to list in China
Those of us who remember the opening up of China's mutual
fund market in early 2000s will remember the tremendous local
response of the Chinese investors to the newly allowed mutual
funds there, and explosive growth in that market thereafter
(the first open-ended fund by Huaan Fund Management in October
2001 raised a record $609 million in its first week).
The mutual fund deregulation also shows the scientifically
precise and progressive approach the Chinese government takes
to these sorts of reforms: it waits and watches for the right
moment, all the while learning from the West, and once the
skillsets are in place, opens up the market at a maturity level
that would perhaps take Western markets decades to arrive
This makes me think that China's hedge fund sector, as and
when it is opened to overseas and local hedge funds, could lead
to a thriving hedge fund culture and a true investment
alternative for the country's growing wealth - both at an
individual and institutional level.
Having said that, many questions remain, such as: When will
more hedging instruments be allowed? Will QDLP only be limited
to HNWs and a handful of institutions? Will global hedge fund
firms need to create new products for the China market? And how
will the distribution, tax assessment and repatriation of funds
work under the QDLP system? I see this as nothing short of a
historic opportunity. The China hedge fund market is on the
cusp of explosive evolution, and firms that spend their
energies understanding this unique market and having strategic
partners in place, will indeed have an edge.
Read more on this in our feature on China in this issue of
AsiaHedge. We also showcase some of the strongest performers of
the month, including NT Asset's Asian Discovery Fund.
Finally, we bring you the final nominations for the
AsiaHedge Awards 2012, and look forward to seeing you at the
Awards night on 25 October in Hong Kong.