(Bloomberg) — A new crop of hedge funds in China is seeking to achieve what’s eluded New York’s biggest money managers: getting wealthy individuals to invest for a decade or more.
After Beijing Hanhe Capital, which manages more than 10 billion yuan ($1.6 billion), tested waters last year by demanding a minimum six-year investment, another smaller player went further with a fund that freezes client cash for 15 years. While a rare example, that’s multiples the time commitment — or lockup — that global fund managers demand.
The world’s most powerful hedge funds are using their muscle to extend lockups, banking on the track record of star managers to win stickier institutional money. In New York, Millennium Management is asking investors to stay five years before fully withdrawing in one structure, while Elliott Management Corp. last year pushed clients to invest for 18 months. In China, the trend has gone even further, with high-net-worth individuals agreeing to invest for three years, five years or even until their children are old enough to inherit the money.
“It’s indeed a trend to lock up products for longer periods as it takes a cycle of three to five years in China to really gain the advantages of value investing,” said Kendrick Zhu, chief compliance officer at Perseverance Asset Management, among the three largest hedge funds by assets in mainland China with more then 100 billion yuan under management. “Quick redemptions often lower clients’ returns or even lead to losses.”
Securing long-term capital gives hedge fund managers greater flexibility and avoids a rush of withdrawals when markets are in turmoil. Typically, the longest lockups have been limited to a handful of the biggest global hedge funds whose performance is so extraordinary they can turn away short-term investors.
Until recently, investors in China typically only stayed loyal for a year or less due to volatile asset prices and a preference for short-term profit taking. That’s now changing. Companies registered more than 600 private securities funds in China with lockups longer than two years in 2020 alone, according to Hengtian Wealth Management, a consultancy.
In a sign that China’s largest hedge funds are now becoming more assertive, Perseverance and rivals Greenwoods Asset Management and Shanghai Minority Asset Management Co. have launched products with three-year lockups or longer. Typically, there is little leeway for clients to exit earlier. At Perseverance, some clients are now even willing to lock up their money for five to eight years, according to Zhu.
For wealthy retail investors who are the biggest financiers of China’s hedge funds, lockups are a risk in a market that’s known for volatile swings. Shanghai Minghong Investment Co., one of China’s biggest quant hedge funds, was caught by a stock market correction earlier this year, prompting record withdrawals and an apology to clients.
Still, investors are prepared to look past recent stumbles. Some 15,000 funds offered by Chinese managers returned 30% on average last year, according to Shenzhen PaiPaiWang Investment & Management Co., more than double the average gain for hedge funds globally.
Shanghai Banxia Investment Management Center, the best-performing macro hedge fund in China last year with a 258% return, is starting to lock up products including its industry-beating Banxia Stable Fund for three years, according to founder Li Bei. Xiaochun Luo, the principal manager at Hanhe Fund I which began in 2013, returned 45% last year. Most of Hanhe’s yuan-denominated funds invest in stocks and now demand a six-year lockup.
In an extreme example, Beijing Gelei Asset Management Center raised about 30 million yuan with a 15-year, long-only stock fund in October. The three investors, all long-term clients, plan to hand over the money along with any profit to their next generation when the lockup ends, according to Gelei’s founder Zhang Kexing, who manages about 3 billion yuan.
“The whole point is to get their hands tied, and when they trust you, whether it’s 10, 15 or 18 years doesn’t really matter to them,” Zhang said.
This kind of loyalty is rare. Three quarters of hedge funds globally have no lockup provisions, according to Eurekahedge, and only about 2% of those that impose such constraints lock up money for longer than two years, said Mohammad Hassan, the consultant’s head analyst for hedge fund research and indexation.
The trend may help Chinese hedge funds retain and build out their investor base in a market where Wall Street giants are struggling to adapt.
Shanghai Minghong, whose offshore fund’s net asset value dropped 27% in the first quarter, is considering three-year lockups in the future, founder Qiu Huiming said. About half of the investors in its commodities fund failed to make any money despite its solid track record because they exited too early, he added.
Although clients often prefer liquidity, “it can be a double-edged sword,” he said.
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