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Hedge Funds in Asia

Wednesday, September 01, 2010

CIC: China's Real First Hedge Fund

"We shall not cease from exploration. And the end of all our exploring will be to arrive where we started and to know the place for the first time."

T.S. Eliot (1888-1965) Little Gidding

In an investment strategy sense, China's sovereign wealth fund (CIC) is the country's first genuine hedge fund. Established in 2007 with approximately $332 billion in assets under management and fed by swollen currency reserves of $2.5 billion, the operation is currently invested in private equity-type deals cross telecommunications, energy and defense industries. Of course, as we are talking about state resources their considerable size is always regarded as potentially political and suspicious.

As roughly 66% of its holdings are in U.S. Treasury bond and mortgage security assets, it is not surprising that one focus of it's investments has been on U.S. companies including Blackstone, Morgan Stanley (although some say that they were rebuffed when they wanted to invest in Goldman) and VISA among others.

It invests directly, but it also is a manager of managers in the sense that it farms out money to hedge funds and private equity funds that themselves invest in underlying strategies and firms. This may explain how and why the largest HFoFs have been getting bigger in the last few years in spite of the fact that quite a few of them have had fairly average performance numbers since 2008.

As previously stated, expect that the recent investment policy focus into "real assets" to see more of a focus on agricultural products, land and mining operations. It would seem that in situations where significant development and project capital is needed (i.e. deep pockets with a 5-7 year horizon) CIC would appear to be in a good situation. As ever, the political implications in potentially sensitive areas may work to counteract the clearly obvious positive NPV attributes that many of these projects is having on a daily basis.

In light of the above, news today that the first registered hedge fund will be opening up to service local Chinese HNWIs in mainland China should be taken with a pinch of salt.

Remember that in Japan in the 1980s when the stock markets were climbing ever higher, the role of corporations investing in hedge funds and other schemes initially added significant revenues to their bottom lines, until these zaitech departments fell foul when markets turned. Expect similar potential stories to emanate out of China in the coming years. Mahalo.