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Hedge funds stay bullish on China

A worker at a branch of ICBC counts money as she serves a customer.
Johannes Eisele | AFP | Getty Images
A worker at a branch of ICBC counts money as she serves a customer.

Hedge fund investors still think China is a top play in emerging markets.

"China is actually one of the best places to invest today," Frank Brochin, chief investment officer of hedge fund firm StoneWater Capital, said at the Alpha Hedge West conference in San Francisco on Tuesday. "The country has been priced as if it were going out of business. It's very difficult to imagine China going out of business."

Brochin said investors can buy into "very good companies" that trade at low single-digit price-to-earnings ratios and are growing between 15 percent and 20 percent.

"Over time if you do that, you should be fine," he said of value investments in the country.

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Brochin said that China was relatively safe because foreigners own very little inside the country and therefore cannot easily flee and depress asset prices. And while Chinese banks have "some bad loans on their books," he said the government has "the financial means to make things right."

"The trigger for financial catastrophe in China doesn't really exist," Brochin said.

Adam Choppin, a manager research analyst for international strategies at investment advisory firm FIS Group, was another China bull at the event.

"China and in particular A-shares are great opportunities right now," he said. A-shares are the stocks of mainland Chinese companies that are just beginning to open up to foreign investors.

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"One of the more rational arguments for investing in China is really that it's a great source of diversification," Sam Hou, founder of hedge fund firm True Arrow Capital Management, added at the same event. "China, because it has been closed off for so long, marches to its own beat."

Hou, a veteran of the former SAC Capital Advisors, was excited by the coming liberalization of the Chinese stock market from the "through train" initiative. That refers to the Shanghai-Hong Kong Stock Connect, a new program set to launch in October to allow investors to play both the Shanghai and Hong Kong stock markets.

Foreign investors previously only had access to stocks in Hong Kong or had to use "Qualified Foreign Institutional Investor" programs, which were limited and only allowed very large allocators. Chinese investors will now also be allowed to trade Hong Kong-listed stocks.

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Not everyone at the Alpha Hedge event was bullish on China.

"We haven't quite found how you invest safely in China," said Steven Quamme, senior managing director of emerging markets-focused Cartica Capital. The fund, backed by the California Public Employees' Retirement System, has zero money in China compared with 25 percent of its portfolio in the Philippines, according to Quamme.

China-focused hedge funds have not had a stellar year so far. The AsiaHedge Chinese Long/Short Equity Index is up 2.13 percent net of fees through August. That compares to 4.33 percent for the HedgeFund Intelligence Global Index - Emerging Market Equity and 38.37 percent for the AsiaHedge Indian Long/Short Equity Index.