History of China's Private Funds-Twenty Years in Retrospect(Year 2012)

A Year of Reckoning

The year 2012 began with a sense of cautious optimism. The Shanghai Composite Index, opening at 2,212 points, hinted at a potential recovery from the doldrums of 2011. By year's end, it would close at 2,269.13 points, a modest gain that masked the turmoil brewing beneath the surface.

For China's private funds industry, 2012 was a year of stark contrasts, a rollercoaster ride of spectacular failures, high-profile scandals, and the emergence of a new breed of investors determined to reshape the industry.

A wave of liquidations swept through the industry, exposing the vulnerabilities of poorly managed hedge funds and shaking investor confidence. In the first 11 months alone, 331 sunshine hedge funds were liquidated, with 112 opting for early termination, a staggering 50% increase compared to the previous year. The industry, once a beacon of unbridled optimism, was facing a harsh reality check.

Amidst the turmoil, a new chapter in the industry's history was being written. The revised "Securities Investment Fund Law," passed in 2012, formally recognized private funds, bringing them under the regulatory umbrella for the first time. This landmark legislation provided much-needed legitimacy to the industry, paving the way for greater transparency, accountability, and institutionalization. Also in this year, 中国证券业协会 was founded on June 6th.

Despite the challenges, the industry continued to grow, albeit at a more measured pace. A total of 1,290 private funds were launched in 2012, raising a combined CNY 73.8 billion($10.28 billion). Innovative fund structures gained traction, with 85% of such funds generating positive returns. The bond market bull run fueled the growth of fixed-income hedge funds, which delivered an average annual return of 4.62%.

The year 2012 witnessed one of the most significant "going private" events in China's financial history. Mr. Wang Yawei, the legendary "King of Mutual Funds," left his high-profile position at China Asset Management Co., Ltd. to launch his own hedge fund, 千合资本管理有限公司 . His move sent shockwaves through the mutual funds industry, signaling the growing allure of the private fund model for even the most accomplished public market investors.

Wang's reputation preceded him. 千合资本管理有限公司 was inundated with investor interest, allowing the firm to command a hefty CNY 30 million($4.18 million) minimum investment threshold. Undeterred, investors lined up to invest, propelling the firm's assets under management past the CNY 10 billion($ 1.39 billion) mark in record time. The media, eager to chronicle every move of the "King," amplified both the firm's successes and its missteps, creating a level of scrutiny that would test even the most seasoned investor.

The year 2012 was also marked by a series of high-profile scandals that tarnished the mutual fund industry's reputation and exposed the dark underbelly of China's financial markets. Mr. Li Xuli, the wunderkind who became CIO of China Southern Fund Management at the age of 30, and then CIO of Bank of Communications Schroder Fund Management Co. Ltd. , was placed under investigation for alleged insider trading, his meteoric rise culminating in a spectacular fall from grace.

In hedge funds industry, Zhang Chao, chairman of Shanghai Zishi Investment, became embroiled in an insider trading scandal, his flagship "Zishi No. 1" fund collapsing like a house of cards.Xu Xiang and his firm, 上海泽熙投资管理有限公司, faced intense scrutiny for their uncanny ability to profit from market swings, raising suspicions of insider information and market manipulation. Chen Jiwu's Kai Shi Investment, once a darling of the industry, became mired in a bitter public feud with its backer, 雅戈尔集团股份有限公司 (SH.600177), over allegations of heavy losses and a power struggle between Chen and Youngor's chairman, Li Rucheng.

Amidst the turmoil, a new generation of quantitative investors emerged, bringing with them a data-driven approach to investing that would transform the industry. Tian Hanqing and Li Haiwei, both former portfolio managers at Barclays Global Investors, returned to China, joining 华泰柏瑞基金管理有限公司（原友邦华泰） and INVESCO Greatwall Fund Management Co. respectively, to build out their quantitative investment platforms. Their arrival, alongside Li Xiaowei, who had returned a few years earlier, marked the beginning of a new era in Chinese asset management.

Wang Chen, a Tsinghua-trained computer scientist who had honed his skills at Millennium in New York, returned to China to launch his own quantitative hedge fund, 九坤投资 in Beijing.

In the mutual funds sector, the mantle of top performer went to the INVESCO Greatwall Fund Management Co. Core Competitiveness Fund(F.260116), managed by Yu Guang and Chen Jiaping , which achieved an impressive 31.7% return for the year.

But the third wave of "going private" reached its peak in 2012, as star mutual fund managers like Wang Ruyuan, Wang Penghui, Lv Yizhen, and Wang Weidong left the world of mutual funds to seek their fortunes in the private funds arena. Their motivations, varied and complex, became the stuff of industry legend.

The year 2012 marked the emergence of a "new force" in Chinese private fund industry, a generation of investors shaped by the lessons of the past and determined to chart their own course. From its humble beginnings as a shadowy corner of the financial system, the industry had come of age, its evolution mirroring the transformation of China's capital markets.

(To be continued...)

Reference：

1. Revised Securities Investment Fund Law in 2012: https://www.gov.cn/flfg/2012-12/28/content_2305569.htm