Wealthy Chinese investors are turning to “sunshine” private trusts, the prototypes of hedge funds in the communist nation, as the property market cools, stocks slump and bank-deposit rates fail to match inflation.
China’s private trust-fund assets tripled to 138.3 billion yuan ($22 billion) in the 18 months to Sept. 30, according to the most recent data from the China Trustee Association, while global hedge-fund assets have stalled at around $2 trillion. The sunshine funds are exempt from some rules placed on Chinese mutual funds, even as limitations such as a ban on short selling means they can’t operate as hedge funds in the same way managers in Hong Kong, London and New York can.
The Rongzhi Hedge Fund Index that tracks 938 sunshine private funds almost doubled from the end of 2006 to December 2011, beating the CSI Stock Fund Index, which includes all Chinese open-ended stock mutual funds, by 47 percentage points. China’s mutual-fund industry shrunk about 35 percent from the end of 2007 to 2.1 trillion yuan in September as the Shanghai Composite Index tumbled almost 60 percent from its 2007 peak.
The Rongzhi gauge dropped 18 percent last year, outperforming the CSI Equity Fund Index by 7 percentage points. The Shanghai Composite retreated 22 percent.
Sunshine private funds are yuan-denominated pools set up by trust companies that raise money from wealthy Chinese clients of banks, with a minimum investment of 1 million yuan. Advisers, such as Beijing-based Springs Capital Ltd., are then hired to run investments.
The pools earned the “sunshine” moniker for introducing more transparent practices of regular information disclosure, and by holding assets in third-party banks, as opposed to earlier private funds, which were largely unregulated. Sunshine funds are indirectly supervised by the China Banking Regulatory Commission, which regulates the trust companies that set up and raise capital for the funds.
Zhao Danyang, who in 2008 paid $2.1 million in a winning bid for Warren Buffett’s annual charity lunch auction, is credited as the grandfather of sunshine private funds. Zhao set up what is believed to be the first sunshine private fund in February 2004. It returned 259 percent through March 16, 2007, or 84 percent a year, according to a report by Ba Shusong, a researcher at the State Council’s Development Research Center.