China’s stock markets have been on a record-setting run over the last few quarters. The Shanghai Composite index hit a seven-year high last Friday and has moved up more than 150% over the last 12 months. The small-cap, technology-focused ChiNext market Shenzhen is up over 300% in the last year.
This stock market frenzy in China has also led to the launch of a slew of new hedge funds and private equity funds, In fact, according to a June 14th article in the Financial Times, more than 4000 new Chinese hedge funds have been established just in the last three months and AUM has increased six fold (not typo) in the same time period.
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Explosion in new Chinese hedge funds
There has been a veritable explosion in the number of private investment funds (including private equity, and venture capital) in China over the last few months. The total number of funds was 12,285 as of June 1st, a massive increase from 7,989 three months before, based on data from China’s securities regulator. Also of note, assets under management were up by a solid $75 billion to $433 billion, a six fold increase.
Feng Gang, chairman of private equity firm WinSure Capital, commented the government is encouraging entrepreneurship in the financial industry. He launched his fund four months ago after 14 years in the financial industry, most recently at China International Fund Management, a joint venture with JPMorgan.
“In the past 14 years I’ve never seen regulators so encouraging of innovation. In the investment industry, we’re taking the lead,” Gang said
A little more than a year ago, the Chinese government switched to a new, more straight-forward registration procedure for private equity and hedge funds, leading to a flood of applications for new funds.
The number of employees at hedge funds and PE funds are also skyrocketing, up by 60,000 in just three months to approach a total of 200,000 employees in the sector as of the beginning of this month.
Keep in mind that Chinese hedge funds tend to be smaller than their U.S. counterparts. Of note, among the 12,285 funds in China, a mere 56 manage more than Rmb 10 billion ($1.6 billion) in assets.
Chinese hedge funds use different sales model than U.S. counterparts
Another key difference in the Chinese hedge fund industry is that western funds are generally the purview of institutional investors, whereas Chinese hedge funds work a good bit more with retail investors, with banks and brokerages serving as key sales channels.
For example, a typical Chinese hedge fund might have a minimum investment of only $160,000 and a lock-up period of a year, compared to U.S, or European hedge funds that typically require an investment of at least one million dollars and longer lock-up periods.
Still can anyone say bubble?