History of China's Private Funds-Twenty Years in Retrospect(Year 2013)

A New Legitimacy

The year 2013 began with a sense of cautious optimism in the air. The Shanghai Composite Index, though ending the previous year on a flat note, seemed poised for growth. However, the year would prove to be a mixed bag, with the index ultimately closing down -6.75%. Yet, beneath the surface of the broader market, a different story was unfolding. The growth-driven ChiNext index soared by an astounding 82.73%, signaling the start of a bull market fueled by the rise of new industries and a new generation of investors.

This year marked a turning point for the Chinese private funds industry. The winds of change, already in motion, brought with them a newfound sense of legitimacy and a wave of fresh talent eager to capitalize on the opportunities presented by a rapidly evolving market. At the end of 2013, the number of sunshine hedge funds in China totaled 2,472, with AUM of CNY 301.7 billion ($ 42.17 billion). There were 977 hedge fund management companies in the country. During the year, the overall return of sunshine hedge funds was 13.63%, with 80% achieving positive returns.

The year began with a symbolic return. Mr. Zhao Danyang, the godfather of China hedge funds, who had famously liquidated his fund in the depths of the 2008 financial crisis, announced his return to the market. His new fund, "China Resources Trust - Pureheart Capital Asia Limited Value Collective Fund," signaled his belief that the time was ripe for value investing in China's volatile markets.

In a contrasting move that underscored the dynamic nature of the industry, Zou Wei, a star fund manager at 嘉实基金管理有限公司 , returned to the mutual funds industry after a brief stint in hedge funds. His decision, hailed as the first "private-to-public" transition in the industry, highlighted the growing acceptance and maturity of both sides of the asset management coin. The market, it seemed, was large enough to accommodate a diversity of approaches and ambitions.

The regulatory landscape also underwent a significant transformation in 2013. The revised "Securities Investment Fund Law" came into effect, formally bringing Chinese private funds under the purview of the 中国证券监督管理委员会 (CSRC). The new law, with a dedicated chapter outlining regulations for privately raised funds, provided a framework for greater transparency, accountability, and investor protection. It also granted private fund management companies access to benefits previously reserved for mutual funds, such as tax incentives, streamlined account opening procedures, and the ability to issue publicly traded products. The industry had finally come in from the cold, its legitimacy as a vital part of China's financial system formally recognized. Data from the 中国证券业协会 (AMAC) revealed the rapid growth of the industry, with 251 private fund managers registered as special members. The future seemed bright, but the year was not without its share of cautionary tales.

Despite increased regulation, scandals continue to occur. The "Muxue Buffett No. 1" fund, launched with much fanfare, became infamous as the shortest-lived hedge fund in Chinese history, liquidated a mere 66 days after its inception. The fund's demise, reportedly triggered by a bitter dispute between the investment advisor, Jiangsu Muxue Information Technology Co., Ltd., and the investor, Shenzhen Kailei Investment Co., Ltd., served as a stark reminder that even in the new era of regulation and oversight, trust and integrity remained paramount.

The year 2013 also witnessed the return of talented individuals from overseas, drawn by the opportunities presented by China's burgeoning hedge funds market. Mr.Xu Xiaobo, a Peking University physics graduate who had honed his investment skills at Citadel in the US, returned to China to found his own shop, 上海锐天投资管理有限公司 .

On the mutual funds side, the growth-oriented market of 2013 provided fertile ground for a new generation of mutual fund managers, tech-savvy and well-versed in the intricacies of emerging industries. Among them, Mr. Ren Zesong of China Post Capital Management Corporation China Post Fund rose to prominence, his Strategic Emerging Industries Fund (F.590008) delivering a staggering 80.38% return to claim the title of top performer. Ren's success epitomized the changing of the guard, as a new breed of investors, comfortable with risk and adept at identifying opportunities in the fast-evolving Chinese economy, took center stage.

By the end of 2013, the Chinese private funds industry had come a long way from its shadowy origins. With a new regulatory framework in place, a growing pool of experienced professionals, and a burgeoning domestic market, the industry seemed poised for a period of sustained growth. However, challenges remained. The industry was also grappling with issues of overcapacity and rising competition, as new entrants flocked to capitalize on the opportunities presented by a rapidly growing market.

(To be continued...)

Reference：

1.Chairman of China Securities Regulatory Commission visits HKEx: https://www.hkex.com.hk/News/News-Release/2013/1301155news?sc_lang=zh-HK