Shorting the credit of companies positioned to do badly from a Chinese slowdown has proved to be one of the hedge fund industry’s most successful trades of 2011.
Hugh Hendry, the outspoken U.K. hedge fund manager known for his bearish, often contrarian views on the global economy, has seen his ‘China short’ fund rack up gains of more than 52 percent so far this year, investors have told the Financial Times.
The gains compare to a loss for the average hedge fund of 4.37 percent over the past 11 months, data from Hedge Fund Research released last week show.
Mr Hendry’s credit fund is constructed from a portfolio of short positions against highly cyclical Japanese corporate credits that have high exposure to Chinese demand.
His larger flagship Eclectica Fund, which also has a portion of its portfolio in credit default swaps contracts against Japanese credits, has performed well too. Investors report it has made gains of 12.2 per cent so far this year.
Mr Hendry began raising concerns about a Chinese slowdown in 2009 — even uploading a homemade video on to the video sharing site YouTube based on a visit to deserted Chinese real estate developments.
Few hedge funds have so far plotted ways to make big bets against the Chinese economy. Jim Chanos, the noted short seller who correctly highlighted corruption at Enron, is one of the only others to have launched a dedicated fund to do so. Mr Chanos’ vehicle wagers that the Chinese property market is vulnerable to a crash.
Interest in China’s diminishing growth outlook is growing, however. Many large hedge fund managers, particularly global macro players, see it as a big source of volatility in the coming years.
The Chinese government’s recent moves to inject more liquidity into the economy have raised expectations of “full-scale easing in China soon”, one of Asia’s largest hedge fund managers, the $1.5 billion Dymon, told clients in a recent letter.