Asia-focused funds and investors have been caught, along with millions of homebuyers, by China’s long-running real estate crisis.
A credit fund, led by a former Lehman Brothers portfolio manager, has taken a big hit in returns that brought years of gains to a sudden halt.
Hong Kong-based L&R Capital’s Asia Credit Alpha Fund, a hedge fund with more than half of its geographic exposure focused on China, fell 18.9% in 2022 as of the end of May, according to documents and a person familiar with the matter.
The fund, led by former Lehman Brothers portfolio manager Li Ran, retreated another 4% in June. The bearish performance looks set to end the fund’s four-year winning streak since inception, according to the filings.
His losses were partly the result of his exposure to Chinese real estate developers as industry-wide pain engulfed even companies with stronger credit profiles, the source said.
The fund’s exposure to the global real estate industry fell to 22% at the end of May from 33% earlier this year, the filings show.
L&R’s performance defeat shows how even seasoned investment managers are struggling to navigate China’s devastating real estate crisis.
China’s real estate sector, a key pillar of the world’s second-largest economy, has lurched from crisis to crisis and been a major drag on economic growth over the past year. It has been seen in series of defaults by debt-ridden developers.
Prudence Investment Management, a Hong Kong-based hedge fund that specializes in China-related credit investments, saw its flagship fund drop 2.5% at the end of June, a performance described as “decent” by its colleagues, according to the documents, and a separate person familiar with the matter.
The fund managed to pare some losses after March as it became more neutral in real estate and diversified into other areas, the person said.
L&R Capital did not respond to inquiries. Prudence declined to comment. All the sources declined to be named because they were not authorized to speak to the media.
“The most challenging investment environment of the last 10 years”
Kenny Chung, portfolio manager of Astera Capital Partnerswhich runs a Hong Kong-based fixed-income hedge fund, said it has not seen “a more challenging investment environment for at least 10 years.”
The fund returned 4.2% in June, benefiting mainly from the net loss of property developers from China earlier in the year and diversification into other regions later.
The damage to the mutual fund space has been just as severe.
The 10 largest Asian high-yield mutual funds posted heavy losses, all above 25% at the end of June, hit in part by their exposure to Chinese property developers, according to data compiled by Morningstar.
The Fidelity Asian High Yield Fund saw its size shrink 40% this year to $2.4 billion at the end of June as returns sank 34.2% in the first six months.
Its exposure to China stood at about 31 percent at the end of June, compared with nearly 38 percent at the end of December, the data showed.
Fidelity did not respond to inquiries.
“Before the collapse of the Chinese property developers, all these high-yield Asian funds were heavily invested in the sector…those [who] They cut their exposure to China earlier this year they’ve done better,” said Patrick Ge, senior analyst at Morningstar.
Reuters with additional editing by Jim Pollard
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Jim Pollard
Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd newspapers in Sydney, Perth, London and Melbourne before traveling around Southeast Asia in the late 1990s. He was senior editor of The Nation for over 17 years and has a family in Bangkok.
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