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China-focused hedge funds risk a wave of redemptions

[HONG KONG] Credit Suisse Group is advising China-focused hedge funds to communicate more with investors, as industry concerns grow that redemptions from the region will accelerate amid market volatility.

China funds tend to allow monthly redemptions versus the quarterly withdrawals on offer from larger regional and global peers. Firms should be in "frequent and proactive contact with investors" to articulate the opportunities they see in the market and the measures in place to mitigate risk, according to Jonathan Jenkins, the Swiss bank's Asia-Pacific head of equity sales and prime distribution.

"Fund of funds will generally have a long list of funds they could redeem from and will frequently choose those that appear to be less transparent," Hong Kong-based Mr Jenkins said.

Commentators are increasingly drawing parallels with the 2008 global financial crisis, when investment losses and redemptions slashed Asian hedge fund assets by 36 per cent. Asian funds were used as ATMs by cash-strapped European wealthy individuals and fund of funds because they had greater liquidity and less stringent redemption terms.

About 86 per cent of China-focused hedge funds allow investors to withdraw money monthly or more frequently, compared with 80 per cent of Asian and European funds, according to Eurekahedge data. Around 45 per cent of US hedge funds allow only quarterly or less frequent withdrawals.

It wasn't until 2013 that industry assets in Asia recovered to levels seen before the 2008 crisis. Global industry assets resumed growth within two years, data compiled by Hedge Fund Research show.

Asia hedge funds monitored by Albourne Partners tend to have a more stable investor base now, one that's dominated by US institutional money, said Richard Johnston, regional head of the consultancy whose clients invest more than US$550 billion in alternative assets, including hedge funds. Only China hedge funds still have large chunks of money from European family offices and fund of funds, he added.

Larger Asia-focused hedge funds have also introduced lockups on investor money, Mr Johnston said. About 55 per cent of investor money with BFAM Partners (Hong Kong), which oversees US$4 billion, is in share classes with two or three-year lockups, a person with knowledge of the matter said.

There's still concern that some US institutions that have over-allocated to private-equity funds may redeem out of hedge funds to meet cash needs because private-equity investments are less liquid, Mr Johnston said.

Optimas Capital in Hong Kong is one firm that's increased communications with investors amid the sell-offs. It gave clients at least five written performance updates and market commentaries in March, instead of the usual one, chief investment officer Thomas Wong said. Mr Wong's US$438 million Optimas Global Alpha Fund was up 1 per cent last month, taking this year's performance to 4.1 per cent, according to a newsletter sent to investors.

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