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China: Hedge funds up the alpha

China study dispels misconceptions about performance.

According to a study by Singapore Management University, hedge funds linked with Greater China are producing more alpha than widely believed.

In China, the short-selling of securities is illegal and foreign investments in A-shares are restricted. It is therefore widely believed that Greater China hedge funds are predominantly long-only, and tend to resemble index funds, producing returns simply by riding the equity market bull run in the region.

The study, commissioned by Fullerton Fund Management, looked at the returns of Greater China funds from 2000 to the end of 2006, and showed that many funds had, in fact, been producing alpha, presumably because many of them have been able to short foreign-listed Chinese stocks in Hong Kong or Taiwan, for example.

In addition to dispelling beliefs that Greater China funds did not produce alpha, the survey claims that the funds are less risky than believed, and, rather, have a market exposure similar to that of US hedge funds.

From the return data analysed, the university’s study says that there is little correlation between market risk and the risk in the Greater China hedge funds. The degree of volatility in relation to the market was similar to that produced by US hedge funds over the same period.

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