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(Bloomberg) — For veteran hedge fund investor Chua Soon Hock, 2024 was supposed to bring the biggest rally in Chinese stocks in years and a once-in-a-lifetime opportunity. If anything, the sudden disappearance of his fund will send a warning to his fellow China bulls to “stick to your guns at your peril.”
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Mr. Chua’s Asia Genesis Asset Management told investors this week that the $330 million fund was shutting down after suffering heavy losses from a wrong bet on Japan and a decline in the Chinese market, and blamed the This is due to the inaction of policymakers, including President Xi Jinping.
“It is with a heavy heart and with the utmost regret that I write this letter,” Chua said in a letter to customers, saying the cash would be returned after the stock plunged about 19% this month. . “I have lost confidence as a trader.”
Mr Chua’s plight shows how even the most experienced fund managers are trapped in China’s market meltdown, exacerbated by limited policy support from the Chinese government. Li Bei, a longtime China hedge fund bull, admitted his mistakes after suffering the worst losses of his career, while global investment firm T. Rowe Price Group have experienced an 80% decline in the value of their holdings over the past few years. That peak.
“All the evidence I’m seeing is that the economic indicators are better than I thought, better than anyone thought,” said Justin Thomson, head of international equities at Baltimore-based T. Rowe Price. It’s much weaker,” he said. “You have had your confidence tested longer and more severely than before.”
China’s benchmark CSI300 index hit a five-year low on Monday, with the number of mutual fund closures reaching a five-year high due to a prolonged slump, in another sign of declining investor confidence. There is. The latest $278 billion bailout gave stocks a brief boost on Tuesday, but many remain skeptical that it will be enough to end the rout.
Zhang Wenchao, president of Shanghai Yunhan Asset Management, which manages about 700 million yuan ($98 million), said the Chinese market was experiencing a “serious lack of confidence” with some investors worried about a possible recession. It is said that they are facing. Zhang tried to buy the stock last week, but was soon forced to sell to cut his losses. Since then, he has sold all his holdings.
“It was very scary. Don’t bottom fish,” Zhang said, adding that investors’ hopes now rest on policy support rather than fundamentals or sentiment. “While stock valuations certainly look good at current levels, we may not have reached the true bottom yet.”
Even one of China’s best-performing macro hedge funds is struggling. Mr. Li of Shanghai Banxia Investment Management Center, which manages more than 10 billion yuan, predicted a bull market in October 2022, betting on a recovery in corporate profits and the real estate sector.
Last year, his flagship fund plunged about 15%, its first annual loss in at least six years, according to the firm’s December letter to investors obtained by Bloomberg. Her maximum drawdown, or decline, was 25% from her peak in mid-2023, the worst decline of her career.
“I made the mistake of assuming I could win right away,” Li said in a WeChat post on Tuesday. He added that the strength of China’s policy response to the struggling economy did not meet expectations.
In total, more than $6 trillion has disappeared from the market capitalization of Chinese and Hong Kong stocks since peaking in 2021.
Read more: China’s top hedge fund founder admits mistake after loss
Meanwhile, Kamet Capital Partners CEO Kelly Go still considers himself a long-term China bull, but has lost weight to China after the market’s significant sell-off last year. reduced.
“We were wrong about last year’s momentum,” he said, adding that the equity allocation to China has fallen to 20% from just over 30% in the first quarter of 2023. Long-only funds, he noted, sold billions of dollars. Last year, Chinese stocks continued to sell.
For investors like Luca Castoldi of Singapore’s Rail Intesa Sanpaolo, there is so much pessimism and doubts about government support that fundamental analysis becomes less effective. Investors no longer care about China, he said, and those who don’t need to invest in China have already exited.
“We can’t use the same metrics as before,” Castoldi said. He now trades with more emphasis on technical indicators, and recently switched from underweight to neutral on Chinese stocks. “I have no idea where the floor is.”
true believer
But few managers have been as candid about their grave sins as Mr. Chua, a veteran of Salomon Brothers & Bankers Trust and former head of investments at the Monetary Authority of Singapore.
Recent wild trading has “proved that my past experience is no longer valid and is actually working against me,” Chua said in a letter to investors. “I lost my knowledge, my trading, and my psychological advantage.”
Read more: Hedge fund Asia Genesis suspends operations after ‘big mistake’ against China
This marked a remarkable turning point for Mr. Chua. As recently as last month, Chua was extolling China’s virtues in a LinkedIn post while slamming the “false narrative” of Chinese critics and Western media. At the end of December, Chua and his team were still confident that Hong Kong and Chinese stocks were nearing their bottoms, while Japanese stocks had recovered to their all-time highs.
China and Hong Kong stocks are “the best risk-reward stock investment setup of my 40-year professional career. I’m extremely bullish,” he posted. “The Chinese are competent, flexible, and good businessmen and enforcers.”
To support that view, his Asia Genesis Fund added more Chinese stocks while increasing its leverage and shorting Japanese stocks, according to a letter from the firm to investors on Monday. As Japanese assets continued to soar, the company exited short calls on January 16, focusing on bets that Hong Kong and Chinese stock prices would recover if the People’s Bank of China lowered interest rates.
“Unfortunately, the PBOC did not cut interest rates and President Xi’s speech the next day showed stock investors that his focus is not on the market,” Chua said in the letter. Through Jan. 18, the fund was down 6% in a week. “I still don’t understand the contradiction of Chinese policymakers not fighting deflation,” Chua added.
Read more: China eyes stock rescue package after receiving $278 billion aid
Meanwhile, Japanese stocks remain sluggish, rising to a 34-year high this month as authorities and stock exchanges push companies to improve shareholder value and strengthen corporate governance.
“In both the short and long term, the principles of risk and reward have been reversed,” Chua wrote. “We made a big mistake with the recent sharp moves in opposite directions by Nikkei and Hong Kong.”
to not give up
Still, some China bulls are not giving up yet.
T. Rowe Price’s holdings in China have fallen to $15 billion from a peak of $75 billion, but Mr. Thompson remains a proponent of China as an asset class even after three years of declines. He believes sentiment is too extreme and the market could rebound quickly.
“I still believe, deep down, that there are enormous benefits to China,” he said. “But China’s era of hypergrowth is over. It will be a different China.”
Meanwhile, Banxia’s Li, who has touted China as a “once-in-20-years” opportunity, says it may take months or quarters more to materialize.
“I always believe that we can achieve good investment performance in the long term,” and will become one of the “best” investors in China, she wrote in a note. “We will spend the next few decades proving this.”
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