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[HONG KONG] Noah Holdings Ltd, which manages the best-performing emerging markets fund of hedge funds, has cut China-related American depository receipts by about one-third this year after shares surged, while adding to yuan-denominated shares listed on the mainland.
The US$73 million Gopher China Equity Selection Fund cut ADRs after a rally led by a few large stocks, William Ma, co-chief investment officer of the Chinese wealth manager's Hong Kong unit, said in an interview. Since the second-quarter, the fund has been boosting investments in so-called A-shares, which are comparatively cheap and have higher expected profit growth than US-listed counterparts, said Mr Ma.
"We worry that the US market momentum is too concentrated. It's sentiment driven," said Mr Ma, who is also co-CIO of Noah's alternative investment arm Gopher Asset Management.
A rally in Chinese stocks listed in the US has been led by companies such as Alibaba Group Holding Ltd, which surged 75 per cent from a December low, and live-streaming video company Momo Inc, whose shares more than doubled this year. Hedge funds have piled into Chinese ADR stocks that have also been bought by index-tracking funds, which raises the specter of exaggerated sell-offs and losses when markets turn risk-averse.
"When there is a lot of profit sitting in people's portfolio, when there is a slight macro risk, people will just run and go," Mr Ma said.
The money manager expects A-shares to get a boost from MSCI Inc's decision to include the nation's stocks in its indexes for the first time. The move has prompted interest from US and European pension funds, said Mr Ma.
The Gopher fund, started in July 2013 to meet investment demand from wealthy Chinese with assets offshore, returned more than 17 per cent this year through June by farming out money to Greater China-focused stock funds, said Paul Gan, its lead manager. Barclays Plc ranked it the best emerging markets fund of hedge funds in the three years to May 2017, with annualized returns of nearly 17 per cent.
The fund invests in about 10 managers focused on China, said Mr Ma. Its return in the first half was driven by gains in US-listed Chinese technology and education stocks, a surge in Hong Kong shares in the first quarter and the recovery of China A-shares that began in the second quarter, said Mr Gan.
The Gopher fund's net exposure to US ADRs has declined to just above 10 per cent, from a near historical high of about 20 per cent at the start of the year, said Mr Gan.
As it boosts holdings in A-shares in China, where shortselling is restricted by regulations, the fund had chosen some low-fee, long-biased funds, said Ma. The Gopher fund has also increased allocations to short-term traders who can weather better temporary volatility in the wake of the rallies, he added.
The Gopher fund has been adding in recent years specialists that focus on specific industries, such as Ally Bridge LB Healthcare Fund, as they can offer benchmark-beating returns or "alpha," Mr Ma said. Led by former Merck & Co scientist and Morgan Stanley head of Greater China healthcare research Li Bin, the Ally fund returned nearly 12 per cent in the first half of this year and 43 per cent since its inception two years ago, according to an investor update.
Gopher Asset Management, Noah's Shanghai-based alternative investment arm which also counts private-equity firm Sequioa Capital as a stakeholder, oversaw US$18.8 billion at the end of the first quarter in funds that allocate to private equity, real estate and hedge funds.