History of China's Private Funds-Twenty Years in Retrospect(Year 2008)

Facing the Abyss

2008, the year began with the Shanghai Composite Index flirting with dizzying heights, a seemingly unstoppable bull market fueled by Olympic fever and dreams of endless prosperity. 5,265 points. A number etched in the minds of investors, a beacon of optimism. By year's end, it would come to represent a cruel joke.

The world was teetering on the edge of a financial precipice, and China, for all its newfound economic might, would not be spared. The collapse of Lehman Brothers sent shockwaves across the globe, freezing credit markets and shattering the illusion of decoupling. In this perfect storm of fear and uncertainty, every financial predator imaginable seemed to surface: black swans, gray rhinos, great white sharks, and the insidious "rat trading" that eroded trust from within.

Foreign LPs, their portfolios savaged by the global crisis, retreated to lick their wounds. The flow of foreign capital into Chinese private funds slowed to a trickle, the once-bright promise of a globalized financial landscape now dimmed by suspicion and doubt. IPOs, the lifeblood of exit strategies, dried up overnight. The year 2008 saw a 62% decrease in the number of listings and a 68% drop in proceeds compared to the previous year, a stark illustration of the sudden chill that had descended upon the market.

Domestically, the pain was just as acute. QDII funds, launched with much fanfare to capitalize on overseas opportunities, were dealt a brutal lesson in the perils of global interconnectedness. Bank wealth management products, burned by the market's precipitous fall, swore off equity investments, leaving a gaping hole in the capital pool.

The Shanghai Composite Index, once a symbol of China's unstoppable rise, plummeted to a gut-wrenching low of 1,664.93 points, a 72.86% drop from its peak in 2007. The world watched in disbelief as the index recorded its worst week in four decades, a stark reminder that even the most vibrant of emerging markets were not immune to the forces of global panic.

Even Mr. Zhao Danyang, the godfather of Chinese hedge funds, known for his steely nerves and contrarian bets, felt the earth shift beneath his feet. Declaring the market overvalued and devoid of opportunity, he liquidated his flagship "Shenzhen Investment ? PureHeart (China) Collective Fund Trust Plan" fund, a move that sent shockwaves through the industry.

Amidst this unprecedented carnage, no equity hedge fund was spared. The average return for hedge funds with a lifespan of over a year was a dismal -18.60%, a stark contrast to the heady gains of previous years. The quest for the year's "least worst" performer became a morbid exercise in damage control.

The crisis exposed a fundamental truth about the industry: the lack of robust risk management and regulatory oversight. The Shenzhen Financial Consultants Association, in a move that underscored the urgency of the situation, issued the first-ever "Private Funds Industry Self-Discipline Convention," a desperate attempt to restore order and prevent a complete meltdown.

Yet, amidst the wreckage, glimmers of hope emerged. China hedge funds, known for their disciplined approach and focus on value investing, managed to limit losses to 33% in average, a testament to the power of sound investment principles even in the darkest of times.And that was a year in which the Shanghai Composite Index fell 65% for the year and the average mutual fund sank 50%.

Mr. Deng Jijun and Zeng Jun, the duo behind one of the few funds to navigate the storm successfully, became unlikely heroes. Deng, a meticulous bottom-up stock picker, and Zeng, a master of macroeconomic forecasting, proved that even in a bear market, skill and strategy could prevail. Their success, however, would be short-lived. The following years would see them part ways, their paths diverging as dramatically as the market they had conquered.

The year 2008 served as a brutal wake-up call for the Chinese private funds industry. It exposed vulnerabilities, tested convictions, and reshaped the landscape forever. It was a year of reckoning, a crucible from which a new era would emerge.

(To be continued...)