Hong Kong seeder preps launch of first offshore A & H-share quant hedge fund
OP Investment Management Ltd (OPIM) has announced a partnership with Charles Wang from Academia Capital Management (Academia) to launch one of Hong Kong’s first A and H-share quant funds for offshore investors, the Academia China Absolute Return Fund.
The Fund will deploy a series of proprietary quant models uniquely adapted to the Chinese Market to generate outperformance. Targeting an initial launch AUM of $100M USD, the open-ended fund is expected to launch in Q4 2016, managed by Charles Wang and his team in cooperation with OP Investment management.
Alvin Fan, Chief Executive Officer of OP Investment Management commented, “Academia’s new fund is among the first wave of A and H-share quantitative strategies through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect. It will provide institutional investors with deep access to China under the professional management of a regional team. With over 20-year experience in global quantitative investment space, and especially his recent years investing in the Chinese market, Charles’ track record brings together the best of both worlds.”
Charles Wang, Director and Fund Manager of Academia perceives high opportunity in launching an offshore version of his fund, “I am pleased on the launch and for Academia Fund to be working with OP Investment Management. There is high opportunity for quant funds to thrive offshore.”
Prior to launching is his own fund, Charles held various investment positions at Putnam Investments and Acadian Asset Management in the United States where he was the Director of Research, and Senior Portfolio manager. The emerging markets fund (ticker: AEMGX) he managed won Lipper Best Fund over 10 Years award in 2010.
In 2010, Charles moved back to Hong Kong as CEO of E-Fund Management, where he launched two RQFII funds and led E Fund as one of the most established China fund houses in Hong Kong. In 2012 he joined Bosera Asset Management in Shenzhen as CIO of their ETF and Quantitative Investment Department, managing the largest quantitative portfolios in the industry and the best enhanced index fund in 2014. Charles has also taken several social responsibilities such as being President of The Chinese Finance Association, and being a member of two renowned institutional, professional American networks named The Institute for Quantitative Research in Finance (Q Group) and Chicago Quantitative Alliance (CQA).
Charles received a B.S. in Mathematics from Peking University and a M.S. in Applied Mathematics at University of Massachusetts, and a Ph.D. in Finance from Yale University.
OPIM is a leading Hong Kong based asset management company established and licensed since 2004 with Hong Kong Securities and Futures Commission (the SFC) to carry out Type 4 (advising on securities) and 9 (asset management) regulated activities under the provisions of the Securities and Futures Ordinance (Cap.571) (the HK SFO). The company is also a member of the Oriental Patron Financial Group and associate of OP Financial Investments Ltd. (Hong Kong publicly listed 1140.HK). OPIM partners with emerging managers to develop innovative strategies for institutional and professional investors. OPIM’s institutional fund platform attracts both managers and investors from around the world working with the industry’s best business partners in alternative asset management.
HK Funds Invest in Menlo Tech
Self-driving car startup Zoox zooms ahead with new $1.55 billion price tag
In the self-driving car arms race, cash is key.
On that front, Menlo Park-based startup Zoox seems to be cleaning up. The company, which is working its own autonomous vehicles, reportedly raised $50 million last month — driving its valuation up to $1.55 billion.
Hong Kong hedge fund Composite Capital was one of the investors, The Wall Street Journal reported Monday. The Journal attributed news of the round of funding to anonymous people familiar with the matter.
The 2-year-old company, co-founded by Stanford engineer Jesse Levinson, so far hasn’t given the public much in the way of a sneak-peek into its technology. Zoox’s website, unhelpfully, offers nothing more than the company’s logo. Its LinkedIn page says: “We’re developing fully autonomous vehicles and the supporting ecosystem required to bring this technology to market.”
The latest round of funding comes after Zoox reportedly raised $200 million at a $1 billion valuation last summer.
That chunk of cash gives Zoox a leg up to compete with others racing to get their self-driving cars on the market, including Google and Uber. The ride-hailing giant recently rolled out a fleet of self-driving Ubers in Pittsburgh.
Zoox, along with 18 other companies, has approval from the California DMV to test its autonomous vehicles on public roads in the state.
SAC Capital Advisors and Och-Ziff
Ken Xu, a former managing director at SAC Capital Advisors and Och-Ziff Capital Management Group LLC, raised almost $300 million for his own Hong Kong-based hedge fund, said two people with knowledge of the matter.
BosValen Master Fund started trading on Nov. 3 with money mostly from institutions, said the people, who asked not to be identified because the information is private. The fundamental equity long-short fund picks stocks with Asian investment themes, they added.
Katherine Quinn, chief operating officer of Hong Kong-based BosValen Asset Management Ltd., declined to comment, citing regulatory restrictions.
New Asian hedge funds started this year raised on average $21.5 million as of mid-October, according to Singapore-based data provider Eurekahedge Pte. Institutions such as U.S. pensions and foundations are gravitating toward managers trained at global companies and starting with larger teams that can meet their risk-management requirements.
BosValen does not have a seeder, which invests in a young hedge fund for a share of its fee revenue, said the people. Other high-profile startups in Asia this year, such as former Goldman Sachs Group Inc. trader Jason Brown’s Arkkan Capital Management Ltd. and Pleiad Investment Advisors Ltd., founded by two ex-Soros Fund Management LLC Asia specialists, have such backing.
BosValen started with 12 full-time employees. It has three partners including Xu, the chief investment officer, Simon Kemp, head of trading and tactical investments, and Quinn.
Xu spent three years at billionaire Steven A. Cohen’s SAC, now renamed Point72 Asset Management LP, as a Hong Kong-based managing director and fund manager focused on Asia long-short equity investments. He left in May to plan his fund.
He worked for four years at Och-Ziff, and was a managing director co-heading Greater China equity long-short investments before his departure from the firm in October 2010.
Singapore Hedge Fund Growth
When Gaurav Bansal’s lawyers told him about Singapore’s tightened hedge-fund rules introduced in August 2012, he faced the prospect of spiraling costs to meet the demands for starting his own fund.
The solution was to sign up with Swiss-Asia Financial Services Pte, which provides infrastructure, office space and services to meet compliance requirements and is licensed by the Monetary Authority of Singapore.
“The regulatory change threw a spanner in the works,” he said, who started his Salmon Global Fund with $4 million of assets in March under the Swiss-Asia Financial umbrella. “They really came to my rescue.”
Bansal is among managers of smaller startup funds in Singapore, Asia’s biggest hedge-fund hub after Hong Kong, who are turning to such platforms to reduce costs. Swiss-Asia Financial signed up 20 managers seeking to start their own funds in the past nine months, while the number of new funds set up more than doubled to seven last year at Gordian Capital Singapore Pte, according to the companies.
“If you have less than $40 million in assets under management and you are launching a fund aimed at global investors, it has become much more difficult,” said Mark Voumard, chief executive officer of Gordian Capital. A platform “that allows managers to focus on their skill set is both a cost-effective and efficient option.”
Asia-based hedge funds oversaw a combined $79.7 billion as of March, having recovered by 41 percent from the April 2009 trough, according to Eurekahedge Pte. In Singapore, 288 fund-management companies had $15.3 billion of assets under management as of March, compared with $25.2 billion managed by 447 firms in Hong Kong, the Singapore-based data provider said.
“The investor network that platforms can offer should also be viewed as a key driver to joining a platform,” said Omar Taheri, business development manager at Swiss-Asia Financial. “After all, raising capital is still one of the most difficult tasks when you start a hedge fund.”
The tighter regulations introduced by the MAS in 2012 mainly affected smaller entities that were previously known as exempt fund managers.
Under the previous rules, companies seeking to start under the exempt status were “encouraged” to have at least two professionals with a minimum of five years of experience, according to Singapore-based law firm Colin Ng & Partners LLP. They weren’t subject to audit requirements, business conduct rules or restrictions on assets under management. The only relevant rules were that they weren’t allowed to have more than 30 qualified investors as clients.
Under the tightened regulations, registered fund management companies must have at least two relevant professionals with a certain level of experience. In addition, they aren’t allowed to manage more than S$250 million ($200 million) or have more than 30 qualified investors as clients, as opposed to licensed funds managers, who have no such restrictions.
Registered managers also have to meet certain capital requirements, need to implement a compliance and risk management framework and are subject to tighter reporting, accounting and auditing requirements, according to the regulator.
The city-state had about 540 exempt fund managers under the old rules, an estimate by PricewaterhouseCoopers LLP showed. About 200 of the exempt-status managers chose to become registered, while about 190 of them obtained a fund-manager license with higher requirements and unlimited assets under management, it said.
About 90 fund managers who were exempt shut down, joined other companies such as family offices or signed up with a platform, while the remaining 60 have either applied for a license or to become a registered fund manager, according to the consulting firm.
“For 80 percent of the exempt fund managers the change in regulation made no difference,” said Peter Douglas, principal of Singapore-based research firm GFIA Pte. “For 20 percent it was terminal.”
Not all newer fund managers are linking up with partners providing non-investment services. Integral Capital Pte started a long-only fund in 2011 under the old regime and chose to become a registered fund manager when the new rules were introduced, even with the higher costs, said Talib Dohadwala, a founding partner at the Singapore-based company. The stricter regulations mandate an audited financial statement as well as a risk management audit, both done by an external firm that could cost more than S$15,000, according to Dohadwala.
“We wanted to be independent and run our business autonomously,” said Dohadwala. “We felt from the beginning that we could meet the requirements under the new regime.”
The new regulations are making Singapore a more sustainable and robust environment for fund managers, according to Bill Jamieson, a partner at Colin Ng & Partners.
“I don’t think those regulations are overkill,” Jamieson said. “Singapore, being a proper financial market, needs proper regulation.”
Bansal found a cost-effective solution by joining Swiss-Asia Financial.
“If you do it exactly by the book and set up a registered office with the amount of space that is required as for the regulations and employees it would easily cost between S$250,000 and S$300,000 per year,” Bansal said. “By setting up business with the platform I save more than half of that amount.”
Five out of 20 that have signed up with Swiss-Asia Financial are either already in business or about to start, Chief Operating Officer Steve Knabl said in Singapore. That compares with one fund a year starting in previous years, he said, adding that the company has seen a “dramatic increase of interest.”
“The challenge we are having is some fund managers are not willing to pay our platform fees,” said Taheri, adding that managers should realize they can save money going with a platform rather than setting up on their own.
Roshan Padamadan also started the Luminance Global Fund, which invests in liquid securities including stocks, bonds and derivatives, in January with Swiss-Asia Financial. He chose to start through the company because it allows him to focus on his investments.
“If you run your own hedge fund, you have to devote about half of your time and energy to administration and organization,” said Padamadan, who started with initial capital of about $1 million and now manages $1.55 million. “Working on a platform, you can spend much more time on the actual investment process. I prefer to keep my head clear for that.”
Credit Suisse AGCSGN.VX +1.63% said Thursday it has hired long-time Nomura Holdings Inc.8604.TO +0.68% hedge-fund executive Aditi Velakacharla to run a Hong Kong-based group at the bank that introduces its Asian hedge fund clients to potential investors.
The Swiss bank is a major player in the Asian hedge fund industry, currently ranked as the second-largest prime broker in the region by assets under management after Goldman Sachs Group Inc., according to an annual survey by industry publication AsiaHedge. The bank’s prime-brokerage unit services roughly $21.5 billion of Asian hedge fund assets.
Ms. Velakacharla is a well-known figure in Hong Kong hedge fund circles, previously working as the regional head of capital introductions for Lehman Brothers and later Nomura when the Japanese bank acquired Lehman’s Asian arm in 2008. A spokesman for Nomura on Thursday declined to comment on her departure.
Asia has seen a flurry of new hedge fund launches this year as large overseas investors take an interest in the region’s better-performing hedge funds. At the end of the third quarter, hedge funds that bet on Asia excluding Japan were up 6.6% for the year versus a 5.3% gain for North American hedge funds, according to data provider Eurekahedge.
“2014 has been the most significant year for new hedge fund launches for a long time with many of them raising meaningful capital,” said Myo Schollum, Credit Suisse’s head of prime services coverage for Asia Pacific, in a statement Thursday.
Hedge funds poised to pile into China via ‘connect’ channel
When the landmark Hong Kong-Shanghai equity link debuts on Monday, a class of investors that China has kept at arm’s length until now – hedge funds – are expected to plunge into mainland shares.
And rules for the coming stock “connect” mean that these more aggressive players will likely be ahead of the pack, as they are not constrained by operational and legal issues that will keep many long-term institutional investors from participating.
The expected influx of foreign hedge funds, who bring a shorter-term focus, will cause jitters about increased volatility in China’s already wild stock market. China has favoured long-term asset managers when allocating quotas under an existing investment programme known as QFII, forcing hedge funds to “rent” quotas from banks.The opening-up to hedge funds creates a dilemma for Beijing, torn between a desire to protect its market’s heavy retail investor base and liberalise its capital account.
Beijing aims to control inflows and volatility hikes by imposing a daily quota of 13 billion yuan ($2.2 billion) plus restrictions on short selling. Analysts say mainland regulators will monitor activity carefully.
“The Chinese government has been worried about protecting its citizens, as hedge funds are more sophisticated,” said Anthony Tse, chief executive of Hong Kong-based hedge fund Pangu Capital. “But letting in these firms is part of any evolution of a capital market.”
For sure, hedge funds eagerly await the scheme’s launch. “They are the most raring to go,” said a broker at a global bank in Hong Kong. “As soon as it opens, they will be straight in.”
Benjamin Chang, chief executive of LBN Advisers, a Hong Kong-based hedge fund, said his firm and his peers will “definitely” participate, predicting that the daily allowance “will pretty much get filled-out”.
The link will let international investors trade Shanghai ‘A’ shares via Hong Kong’s stock exchange while mainland investors can deal in Hong Kong ‘H’ shares via the Shanghai Stock Exchange, subject to quotas both ways. Daily purchases of Shanghai stocks are limited to about 19 percent of the exchange’s average daily value of securities traded, according to Goldman Sachs.
Data from consultancy Eurekahedge shows 35 hedge funds have set up this year in Hong Kong, taking its number to 495, the most since before the global financial crisis.
Funds focusing on fundamental stock-picking and relative value strategies that exploit price differences between companies listed in both Hong Kong and Shanghai are expected to be first out of the gate.
These funds look to snap up winners before long-term investors, and position themselves before the gap between Hong Kong and mainland stocks – which has narrowed significantly in recent months – closes further.
The head of equities at a European bank said his team had been flat-out arranging mainland road shows for hedge funds. The broker at a global bank said several hedge fund clients had hired research analysts to trawl through China’s mid-caps.
Pangu’s Tse said quality consumer stocks such as liquor-maker Kweichow Moutai Co. and dairy Inner Mongolia Yili Industrial Group Co., plus some aerospace and automobile companies, look attractive.
Some conservative asset managers, including Vanguard, have said technical issues, particularly Shanghai’s unusual trade settlement process, will keep them from participating at the start. The managers say Shanghai’s settlement rules could result in signalling their trading intentions to the market.
Another issue that could dampen initial volume is uncertainty over the scheme’s tax rules. Chang of LBN Advisers said he does not see these matters as obstacles, adding: “You have to do what you have to do.”
Top-Performing China Hedge Fund Exceeds $1 Billion in Assets
Golden China Fund, the best-performing hedge fund investing in the nation over 10 years, exceeded $1 billion in assets for the first time with bets on financial, real estate and technology stocks.
The fund, managed by Greenwoods Asset Management Ltd. founder George Jiang, had $1.1 billion in assets at the end of August, said Joseph Zeng, Hong Kong office head of the Shanghai-based company. The first time it crossed the $1 billion mark on a month-end basis was in July, he added.
Golden China Fund is bucking the trend among hedge funds investing in Chinese stocks that are heading for the worst performance in three years as a slowing economy is depressing stock-market returns. The fund has returned 14.5 percent net of fees through the end of August, according to a newsletter published last month. That compares with 2.7 percent for the Eurekahedge Greater China Long-Short Equities Hedge Fund Index.
“What sets the fund apart is that it is reasonably diversified,” said Mohammad Hassan, an analyst at Singapore-based data provider Eurekahedge Pte. “They avoid overexposure to a single sector and it seems they have a number of good names on their books.”
Golden China Fund, which bets on rising and falling shares, has returned an annualized 28.6 percent over the past 10 years through the end of August, according to Eurekahedge. That’s the highest among all hedge funds investing in China with a 10-year track record, the data provider said.
The fund invests in Hong Kong-listed shares and American depositary receipts of Chinese companies, as well as yuan and foreign currency-denominated shares on China’s exchanges, according to Zeng.
Among the fund’s biggest long positions at the end of August were financial stocks, real estate shares as well as stocks of technology, media and telecommunication companies, according to the newsletter.
“Valuations of financial and real-estate stocks are low at the moment as the market has been rather pessimistic on those sectors for a while,” said Zeng. “However, we have a contrarian view on these sectors and are long some stocks which we regard as highly undervalued.”
Hong Kong’s benchmark Hang Seng Index (HSI) is little changed since the beginning of the year after climbing about 26 percent in 2012 and 2013 combined. Financial stocks in the CSI 300 Index (SHSZ300) are currently trading at 5.9 times their 12-month forecast earnings, a 33 percent discount to the five-year average multiple of 8.8, according to data compiled by Bloomberg.
Golden China has also invested in Ctrip.com International Ltd. (CTRP), China’s biggest travel website, and Internet company Tencent Holdings Ltd. (700), Zeng said.
It has short positions in building materials stocks because of slowing demand and declining prices, he said. It is also shorting stocks of manufacturers and machinery as labor costs are rising and demand is slowing down, he said. Shorting involves selling borrowed shares with the view their prices will drop and they can be bought back at a profit.
Golden China Fund, which charges a management fee of 1.5 percent and a performance fee of 20 percent, has both long and short positions in consumer stocks, according to the newsletter.
Greenwoods Asset Management managed $3.6 billion as of end of August, Zeng said. Its second-biggest fund is the Greenwoods China Alpha fund, which had $489 million at the end of August.
The firm expects China’s economy to grow between 7 percent and 7.5 percent this year.
The world’s second-largest economy will probably expand 7.3 percent this year, according to a Bloomberg survey of economists from Sept. 18 to Sept. 23. That would be the slowest pace since 1990.
Emerging hedge fund managers lead industry gains, says HFR
Emerging hedge fund managers have led industry performance over the past year, as equity markets have extended gains, investor risk tolerance has escalated and total hedge fund capital has increased to a record level.
Emerging hedge fund managers with a track record of less than two years have posted an average gain of 11.3 per cent in the trailing 12 months ending 2Q14, topping the gain of +9.1 per cent for the HFRI Fund Weighted Composite, as reported in the latest HFR Market Microstructure Industry Report released today by HFR.
The HFRI Diversity Index, comprised of hedge funds owned by women and ethnic minorities, has gained 11.1 per cent over the same period.
New hedge fund launches totalled 285 in the second quarter of 2014, in line with both 289 from the first quarter and 288 from the second quarter of 2013. Launches for the trailing 12 months totalled approximately 1,050 funds, slightly below calendar year totals from the past three years.
Hedge fund liquidations declined to 189 in the second quarter of 2014 from 272 in the prior quarter; liquidations in the trailing 12 months totalled 979 funds, exceeding the liquidations in each of the prior four calendar years and the highest since 2009, following the financial crisis.
HFRI performance dispersion narrowed over the last four quarters ending 2Q14, with both top and bottom deciles of HFRI constituents converging toward average industry performance. The top decile of HFRI constituents posted an average gain of +34.4 per cent in the trailing 12 months through 2Q, the second highest gain since 2010, trailing only the +41.6 per cent gain from 2013. The bottom decile of HFRI performance posted an average decline of -12.7 per cent, improving 600 basis points from the -18.9 per cent decline for the 2013.
The average management fee industry wide charged by hedge funds in 2Q was 1.52 per cent, unchanged from the prior quarter, although management fees have declined two basis points from 1.54 per cent since 2Q13. The average incentive fee charged by hedge funds in 2Q declined three basis points to 17.96 from the prior quarter. Fee data was mixed for the vintage of funds launched in the second quarter, with average management fee of 1.51 per cent, falling from the first quarter of 2014, but in line the FY 2013 launch average of 1.52 per cent. Incentive fees for new 2Q launches averaged 17.6 per cent, the highest level since 3Q12.
“The capital raising environment for new hedge funds has improved, but it continues to be challenging for new and emerging managers to meet the demands of risk-conscious institutional investors. However, in the present paradigm of low interest rates and low inflation, investors are likely to benefit from the unconstrained return generation capabilities and idiosyncratic innovations which new, emerging hedge fund strategies add to their portfolio exposures and allocations.”
Hedge funds target fall in UK house prices
10 Oct 2014
Hedge funds are building short positions against the UK residential property sector, targeting firms such as Zoopla, Rightmove, Barratts and Foxtons, as signs of a slowdown in the property market begin to build.
Their move come as a number of surveys have suggested that property prices, particularly in the crucial London market, are starting to cool.
Millennium Management, which has approximately $23.8 billion in assets under management, declared a 0.5% short position in residential property development Barratt Developments on October 3, according to regulatory filings. The share price of Barratt, with a market cap of £3.6 billion, has plateaued since September 1st, rising 0.3%.
Popular property websites Zoopla, currently worth £894 million, and Rightmove, £1.9 billion, have also been shorted this month.GLG Partners revealed a 0.56% short on Zoopla on October 2, and a 0.51% short on Rightmove four days later. Zoopla is down almost 15% since September 1st, and Rightmove down 21.5%.
Hedge funds are required to declare short positions over 0.5% to the UK financial regulator. Unless noted, the hedge funds mentioned in this article did not hold short positions over 0.5% prior to the filings.
House price demand slowed nationally for the third consecutive month in September, according to a survey from the Royal Institute of Chartered Surveyors (RICS) this week, which also showed London prices falling.Also this week, mortgage provider Halifax said that it expects house prices to moderate for the rest of 2014 and into next year.
Fund managers have also turned their attention to major estate agents, with two firms shorting Foxtons this month.
London based AKO Capital, which manages approximately $9.1 billion across long-only and long-short equity funds, increased its short position on Foxtons by 0.25 to 1.17% on October 7th, while JP Morgan Asset Management has also opened a 0.84% short position on the estate agent on October 1.
With a market cap of £590 million, Foxtons’ share price has fallen 14% since the start of September.
With the UK general election in May 2015, Walker at Schroder’s also highlighted the potential political uncertainty that may affect the UK housing market. “What does happen over the next 12 months as we get closer to elections is that various politicians make various comments that will help votes. We have already seen that in the form of mansion taxes, and that will inevitable cause some cooling off of the residential market.”
Some hedge funds have been betting on a fall for a number of months. Minnesota-based Pine River Capital Management also holds a short position on Rightmove, decreasing it slightly by 0.04 percentage points to 0.76% on September 25.
Brookfield Investment Management declared a 0.59% position on Savills in early August, while Highbridge Capital Management increased its short position on property investment and development company Helical Bar to 0.91% in late August. Helical Bar’s share price has fallen 1.8% since September 1.
Millennium International and Pine River declined to comment. Highbridge Capital, Brookfield Investment Management, GLG Partners, AKO Capital and JP Morgan Asset Management did not respond to requests for comment. Pine River Capital could not be reached for comment.
None of the property firms mentioned responded in time for press.
Shanghai-Hong Kong stock connect scheme to lure hedge funds
Linkage of the Shanghai and HK bourses will allow foreign investors to buy mainland shares without having to borrow QFII quota from banks
Hedge funds may drive initial demand for Shanghai-listed stocks through a linkage of the city’s bourse with that in Hong Kong, which opens up a new route for foreign investors to buy mainland shares, according to Goldman Sachs.
The link would tap into pent-up demand from hedge funds to buy yuan-denominated A shares in Shanghai, said Shane Bolton, the head of Asia prime brokerage at the New York-based bank. Long-only managers might grapple with pre-requirements that were different from their usual practice at the beginning, he added.
Foreign investors so far can only buy yuan shares listed on the mainland through the qualified foreign institutional investor (QFII) and the renminbi QFII programmes. The link, set to start next month, would allow investors, with or without their own QFII licences, to buy as much as 13 billion yuan (HK$16.4 billion) of Shanghai-traded yuan stocks a day, said a statement posted on the Hong Kong stock exchange’s website.
“Stock connect will be a game changer for most hedge funds, allowing them to access A shares for the first time without having to use banks’ QFII quota,” Bolton said.
Few hedge funds have been able to win their own QFII licences, which are typically reserved for long-term investors such as mutual fund managers, endowments and sovereign wealth funds. Instead, hedge funds have been borrowing QFII quotas from banks to buy A shares with such quotas in short supply when demand is high.
Shanghai-listed stocks accessible to foreign investors through the link will account for about 90 per cent of the bourse’s market value and 80 per cent of its average daily turnover, according to a May presentation posted on the Hong Kong exchange’s website.
Investors have been betting the link will help narrow the pricing gap between the two exchanges. The Hang Seng China AH Premium Index advanced to 97.7 in May after the plan’s initial announcement. It trades at 100 when prices between dual-listed shares are equal.
“We have seen an increase of interest in A shares after stock connect was announced in April,” Bolton said. “The interest is coming from both relative-value funds keen to exploit the price differences between A and H shares, and also fundamental stock pickers.”
The bourse connect rules required an asset manager to transfer shares held in a custodian bank account to the broker the day before they executed a sell order, the Hong Kong exchange’s website said.
In most other markets, long-only managers can have the securities delivery and payment between the custodian bank and the broker done on the settlement day, after the trade has been executed. Long-only managers may struggle with the rule in the beginning as it may signal to the market their sell intention.
Hedge funds were spared the problem by using prime brokers that could act as custodian and execute trades, as well as providing synthetic products, said Bolton.
Synthetic products are created artificially to simulate another instrument. For example, a synthetic stock can be created with simultaneous trades of call and put options.
Citigroup had worked with Hong Kong Exchanges and Clearing, the operator of the city’s bourse, to develop a solution that would not require pre-delivery of shares from custodian to broker, said Cindy Chen, the bank’s Hong Kong head for securities services.
Beijing has granted US$59.7 billion of QFII quota to 254 financial institutions, according to an August update posted on the website of the State Administration of Foreign Exchange. Goldman Sachs had US$300 million of such quota and held a further US$600 million quota through its asset management arm, the document said. Banks have been lending out their quota for fee revenue.
“Even after the implementation of stock connect, there will still be demand from both long-only managers and hedge funds for QFII quota,” said Jignesh Patel, a managing director on Goldman Sachs’ prime brokerage team. “QFII allows them to trade other products, such as Shenzhen-listed stocks and convertible bonds, which stock connect at present doesn’t cover.”
In addition, for investors to trade through stock connect, both the Shanghai and Hong Kong exchanges need to be open on the day. QFII did not have such restrictions, Patel added.