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Trader who made 6,200% on China futures says go short or get out

[BEIJING] Huang Weimin, the hedge fund manager whose Chinese stock-index futures wagers returned more than 6,200 per cent last year, has some advice for investors in 2016: Sell your shares now, before it's too late.

The 45-year-old former worker at a state-owned company, a virtual unknown until last year, has become a star of the Chinese futures market after a slew of timely bets on the direction of share prices propelled his Yourong Fund to the top of the country's performance rankings. He's carried the winning streak into 2016, returning 35 per cent through Jan 22 after selling stock-index futures just days before the market's worst-ever start to a year.

Huang, who opened the Yourong Fund in 2014, says China's benchmark Shanghai Composite Index could drop another 15 per cent in the first half as slowing economic growth and a weaker yuan fuel capital outflows. While he's sticking with bearish futures bets to take advantage of further losses, he says the average Chinese stock investor would be better off shifting into cash.

"I'm not optimistic about this year," said Huang, a self-taught trader who manages more than 100 million yuan (S$21.8 million) in the Yourong Fund and separate client accounts that use similar strategies. "My advice is to hold cash, wait and watch." Many of China's 99 million investors appear to be doing just that. Volumes in the nation's US$5.6 trillion cash equities market slumped to the lowest level in three months last week, while trading of stock-index futures has dropped about 99 per cent since June. A bungled government attempt to introduce market circuit breakers in the first week of 2016 deepened investor pessimism after the mechanisms sparked panic instead of restoring calm.

Huang's ability to profit from the turbulence has made him a standout in China's hedge-fund industry, which has struggled to cope with price swings that reached the most extreme levels since 1997 last year. More than 700 funds were forced to liquidate prematurely in 2015, and this year's 18 per cent slump in the Shanghai Composite has left many more on the brink of shutting down.

The Yourong Fund was the best performer last year among 310 private Chinese futures funds tracked by Shenzhen Rongzhi Investment Consultant Co. Huang's closest rival was up just over 1000 per cent, while more than a fifth of his peers posted losses, according to Shenzhen Rongzhi, which collects performance figures directly from the financial institutions where funds hold their trading accounts to ensure the data's authenticity.

To make money last year, Huang had to be nimble. He was bullish for much of the first half, building long positions in stocks and equity-index futures as the Shanghai Composite surged to seven-year highs. After trimming his equity exposure in May, he bet against the market in the second half of June as shares tumbled.

When volatility increased at the end of that month, Huang turned to short-term wagers. A short-term bet on Everbright Securities Co that he sold the following day, for example, produced an 11 per cent return on June 30 as the market posted a brief rally, he said in an interview with Bloomberg News last week from China's southern Fujian province.

Huang moved in and out of the market over the next two months, making one of his most profitable bets in late August after positioning for losses in stock-index futures before a rout that sent the Shanghai Composite down as much as 25 per cent in just two weeks.

"It's like surfing," said Huang, who became a full-time investor in 2006 after quitting his job at a state-owned company. "You have to dance on top of the waves." Aside from good timing, Huang's outsized returns were made possible by the built-in leverage of futures. The purchase or sale of a futures contract typically requires an initial deposit, known as margin, that's just a fraction of the value of the underlying assets. That means even small price changes can lead to big profits - or losses - for holders of the derivatives.

Huang sees China's stock market coming under pressure this year from both the economic slowdown and a potential surge in the supply of new shares.

Gross domestic product growth fell to 6.9 per cent in 2015, the weakest pace since 1990, as an estimated US$1 trillion of capital flowed out of the country last year and the yuan posted its biggest annual drop in two decades. Despite six interest rate cuts by China's central bank, the latest economic indicators for December showed growth is still slowing.

"When you add a lot of cold water into the pot, the firewood we have is for sure not enough,'' Huang said.

With 660 Chinese companies waiting to sell shares via initial public offerings, Huang said the additional supply could divert funds from existing shares. The impact could be even bigger if policymakers follow through on plans for a registration system, which would reduce the government's ability to control the pace of offerings.

There are signs that Chinese shares are poised for a rally. The Shanghai Composite's relative strength index was 33 on Friday, near the threshold of 30 that some traders use as a signal of recovery. Li Yuanchao, China's vice-president, said in an interview in Davos last week that the government is willing to keep intervening in the stock market to make sure a few speculators don't benefit at the expense of regular investors.

The government's intervention has made life more difficult for Huang. He had to pare back his positions last year, particularly in bearish contracts, after authorities cracked down on what they saw as excessive speculation in the stock-index futures market and vowed to go after "malicious" short sellers.

Still, none of that seems to have hurt Huang's knack for calling the markets. Cai Zhongyu, a retired electronics institute worker in Shanghai who's been following the trade recommendations dispensed by Huang in online chat groups since 2009, said she made a 300 per cent return last year "all thanks to him." "He always got it right on the market direction," Cai, 55, said by phone. "You have to admit that." Cai was among more than 90 admirers of Huang who travelled to the coastal city of Xiamen to hear him give trading tips and his market forecasts in December. After an extraordinary 2015, his outlook for this year was decidedly more modest.

"I'll just be following the market and do a few trades as it falls, like ants biting on a bone," Huang said. "If I get 5 to 6 per cent each time and end the year with 50 per cent to 60 per cent, I'd be happy."