Two Sigma ramps up China hedge fund push after 22% return

TWO Sigma Investments is stepping up its bid to tap the wealth of Chinese investors by asking them for a fresh round of cash for its outperforming fund and expanding local headcount.

The US quant giant's China private fund business - the local equivalent of a hedge fund - is seeking to raise about 1.2 billion yuan (S$248 million) for its managed futures product, adding to about 3.8 billion yuan in assets the firm has amassed since early 2020, according to people with knowledge of the matter.

The Shanghai-based unit also plans to double its local staff to more than 20 people this year, the people said, asking not to be identified discussing private information.

New York-based Two Sigma, which obtained the China private fund licence in 2019, joins Bridgewater Associates in expanding Chinese assets after establishing a solid local track record.

After initially struggling to penetrate the world's most promising wealth market, some global hedge funds are starting to impress Chinese clients as this year's stock market rout pummels the often-dominant local stock funds. Two Sigma representatives declined to comment.

The fund, which invests in commodities and financial futures, gained 51 per cent through April 30 since its inception 2 years earlier, suggesting an annualised 22 per cent return, according to a marketing document seen by Bloomberg. It rose about 12 per cent in the first 4 months of this year, beating a 4.3 per cent average return for equivalent products tracked by Shenzhen PaiPaiWang Investment & Management Co.

The performance would be considered above average and the fund appeals to investors who expect its returns to be stable given Two Sigma's global track record and risk controls, said Li Minghong, a Shanghai-based fund of hedge funds manager at Aichen Asset. "When they grow big, how they adapt to the local market remains key," Li added.

Such futures funds, also known as commodity trading advisors, were the only profitable hedge fund strategy this year through April in China, bolstered by a boom in raw materials and the fallout from the war in Ukraine.

Hedge funds tracked by PaiPaiWang posted an 8 per cent loss on average for the first 4 months. Bridgewater Associates's China funds gained 4.8 per cent in the first 4 months, ranking it the third among the best-performing hedge funds managing more than 10 billion yuan, according to PaiPaiWang.

Ray Dalio's firm last year became the only global firm in the top league after raising 8 billion yuan for its third onshore product.

The China fund leverages Two Sigma's global research resources to build computer models before a local portfolio manager executes the strategy onshore, and the company has been developing models tailored for the China market, the people said. The local team of about 10 people, led by Carissa Xu, focuses mostly on execution and risk management.

The company is raising money from retail investors through a China Resources Trust product, distributed by brokerages including Citic Securities Co and 2 banks. The feeder trust plan's minimum subscription requirement for its investors, which can be individuals or enterprises, is 2 million yuan, compared to the 20 million yuan threshold in the Two Sigma fund itself, according to the people.

The fund targets 10 per cent in annualised volatility and has been able to keep fluctuations within the designed range. The product's biggest drawdown of about 5.4 per cent was recorded in July 2020 as bets were made on the wrong side of the market, but the company has since adjusted the model, the people said. BLOOMBERG


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