China's fund-of-funds industry is set to play an increasingly important role in shaping the country's fledgling hedge fund sector, even as some question how effective a gatekeeper it can be at its own early stage of development.
The need for talented gatekeepers is clear. The ranks of China's private “hedge fund” firms — so-called even though only a fraction employ derivatives and futures contracts to hedge — more than doubled to 18,000 since 2013, when a regulatory framework for them was established.
That has left thousands of newly minted firms competing for the client assets they need to sustain themselves, while posing a challenge for institutional clients looking to separate the wheat from the chaff, said Yeh Chengsen, a partner with ZeeDao Holdings Co. Ltd., a Shanghai-based solutions provider for hedge funds and their institutional clients.
To help the best Chinese hedge funds grow, ZeeDao structured a hedge fund conference in Shanghai in mid-February as a “matchmaking exercise,” bringing 50 Chinese fund-of-funds firms together with more than 1,000 hedge funds, said Mr. Yeh, who serves as CEO of his group's own fund-of-funds operation, ZeeDao Hulian Investment Management Co. Ltd., launched recently with 50 million renminbi of partner money.
While there's no definitive data, market veterans agree fund-of-funds assets are growing quickly now as more asset managers, banks and insurers launch their own fund of funds businesses.
The China Fund of Funds Alliance, an industry association launched in March 2016, predicts combined assets for all fund of funds — including those that invest in private equity, publicly traded securities and real estate — will more than triple to 1 trillion renminbi ($145 billion) by the end of 2017 from RMB 300 billion at present, a spokeswoman for the association said.
Brian Ingram, president and general manager of Russell Investment Advisors (Shanghai) Co. Ltd., said it's unlikely that public security fund of funds account for more than 20% — or RMB 60 billion — of the China FOF Alliance total. But that pool could more than triple by the end of the year, as relatively strong growth allows it to claim a bigger chunk of a fast-growing pie, he said.