As China’s markets tremble in the aftermath of Covid outbreaks and Russia’s invasion of Ukraine, one of the country’s top macro hedge funds is bracing for more pain.
Shanghai Banxia Investment Management Center, which ranked first in the country in 2020, has reduced its stock exposure to zero in anticipation of a worsening economy and further declines inequities, according to founder Li Bei. The fund, which manages over 5 billion yuan ($785 million), has also closed almost all short positions in commodities after losses were incurred due to rising prices.
“This year could be even worse for fund managers than 2008,” Li said in an interview this month when holding government bonds could still be a winning strategy even during the global financial crisis. “It’s now extremely difficult for them to find a job where they can make money.”
Unpredictable events, such as the war in Ukraine and the rapid spread of the omicron variant, have caught China’s best-trained money managers off guard. According to Shenzhen PaiPaiWang Investment & Management Co., macro funds, which frequently trade-in equity, bond, and commodity markets, averaged a 7.4 percent loss in the first quarter, the worst performance among eight hedge fund strategies.
Following steep losses, DH Fund Management, a macro fund with more than 10 billion yuan under management, apologized to investors and reduced management fees this month.
Li’s low-volatility Banxia Macro Fund, which gained 60% last year, fell about 7% in the first quarter. After abandoning a strategy similar to Bridgewater Associates, it gained 258 percent in 2020. According to PaiPaiWang, Bridgewater’s onshore China funds gained 4.8 percent last quarter.
While Li’s zero stock exposure is nothing new in her career as a macro manager, it contrasts with peers who have been buying stocks, particularly after Vice Premier Liu He’s pledge of support sparked a rally in March that has since peaked. Top quantitative funds also reported that their stock positions remained fully stocked during the declines, with some buying the dip.
“People are overly optimistic,” Li said over the phone during a citywide lockdown.
Because of the highly contagious omicron, China’s Covid Zero policy requires Shanghai residents “to make sacrifices, the economy to suffer a greater impact, and more listed companies to suffer certain losses,” she wrote in a recent WeChat article. Fund managers in the city, who must deal with economic fluctuations while also dealing with Covid tests and looking for food, are “truly exhausted,” she adds.
According to PaiPaiWang data, Shanghai is home to 2,245 hedge funds, accounting for roughly one-quarter of the country’s total.
While the possibility of more and longer lockdowns threatens to slow the economy further, Li believes that room to stimulate growth is limited by high commodity prices and a shrinking interest-rate spread with the United States as the Federal Reserve accelerates hikes. She believes that increasing leverage is unlikely because local governments’ debts are already high and households’ desire to borrow mortgages has waned.
Investors have resumed selling Chinese stocks following last month’s pledge to stabilize markets, which has resulted in few concrete measures so far. The People’s Bank of China reduced the number of cash lenders set aside as reserves this month but did not lower interest rates.
The benchmark CSI 300 Index fell as much as 2.7 percent Monday, wiping out the rally that had begun in mid-March, as news that lockdowns were spreading to Beijing sent stocks, commodities, and the yuan tumbling.
Li believes the central bank will have to start cutting rates later this year, most likely after commodity prices have stabilized, thereby boosting bonds. “Otherwise, there’s no way out,” she said, adding that she’s invested the majority of Banxia’s money in government notes, particularly those with tenures of less than five years.
Stocks will likely fall further as the economy and earnings disappoint, before rising as borrowing costs fall and the outlook improves, she predicts. Ban Xia still has about 10% of its money invested in equity positions that are fully hedged by index put options.
“Hopefully, I’ll be able to make money this year,” Li said. “But not nearly as much as in recent years.”