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Hong Kong hedge funds' US$1 billion redemptions in the third quarter one of the largest since 2009 global crisis: Eurekahedge

Chad Bray chadwick.bray@scmp.com

Investors took about US$1 billion out of hedge funds in Hong Kong in the third quarter, one of the largest quarterly outflows in the city since the global financial crisis a decade ago, according to a new report by Eurekahedge.

The net investor redemptions in the three months ended September came as the city's economy has struggled against the backdrop of the US-China trade war and one of the worst political crises in the city's history.

The redemptions matched the US$1 billion in outflows in the second quarter of 2016. The largest quarterly outflows in the past decade were US$6.4 billion in the first quarter of 2009 and US$2.6 billion in the second quarter of that year, the financial data provider said.

Mohammad Hassan, head analyst for hedge fund research at Eurekahedge in Singapore, said the Hong Kong redemptions, however, were "not very significant" when viewed against the US$121 billion that has flowed out of hedge funds globally over the course of this year.

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"The political crisis in Hong Kong is yet to pose any meaningful threat to the region's resilient hedge funds industry," Hassan said. "The opportunity and access that managers based in Hong Kong provide to Chinese onshore markets and to the broader region as a whole is unlikely to be eclipsed in the near term unless things really spiral out of control."

The hedge fund industry in Hong Kong had about US$92.1 billion in assets under management as of August, according to Eurekahedge. Over the course of the year, the city's hedge fund industry has recorded about US$300 million in net redemptions, representing the first negative flows since the height of the global financial crisis in 2009, it said.

As part of her policy address on Wednesday, Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor said the city's economy had slipped into a "technical recession" since the end of the third quarter, with gross domestic product declining by 0.5 per cent. Several economists have said that they expect the city's economy to contract this year.

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The protests began in June over a controversial extradition bill that would have made it easier to send criminal suspects to mainland China for trial, but have evolved into a broader debate over income inequality and the mainland's growing influence over Hong Kong.

Lam said in September that she would formally withdraw the bill, but that has done little to stem increasing violent clashes with the police. More radical demonstrators also have targeted MTR Corporation and mainland-affiliated businesses with vandalism.

The weekly clashes have led to temporary shutdowns of the city's transit system and weighed on the bottom lines of retailers, restaurants and hotels as people have stayed home on weekends and tourists have avoided the city.

Hong Kong's Chief Executive Carrie Lam said on Wednesday during her annual policy speech that said the city's economy had slipped into a 'technical recession' since the end of the third quarter, with gross domestic product declining by 0.5 per cent. Photo: AFP alt=Hong Kong's Chief Executive Carrie Lam said on Wednesday during her annual policy speech that said the city's economy had slipped into a 'technical recession' since the end of the third quarter, with gross domestic product declining by 0.5 per cent. Photo: AFP

In a research report this month, Goldman Sachs estimated as much as US$4 billion in capital may have headed from Hong Kong to Singapore amid the protests this summer. That would still be small compared with the Hong Kong dollar and US dollar deposits in Hong Kong, which accounted for about US$1.5 trillion at the end of August, the investment bank said.

The Financial Times reported on Thursday that wealthy residents in Hong Kong were opening bank accounts in Singapore and other countries as a hedge against extended unrest in the city, citing a sharp increase in overseas account inquiries at global banks, including UBS, HSBC and Credit Suisse. The newspaper said that account openings had not yet resulted in a large amount of cash leaving the city.

"Apart from the US-China tariff spat, Hong Kong's stability as a financial centre came under scrutiny due to the ongoing protests and social unrest in reaction to the extradition bill proposed by the government in February 2019," Eurekahedge said in its report. "The protests, which have continued for months have unnerved the markets for fear of capital outflows, eventually culminating in the downgrade of Hong Kong's credit rating by major agencies."

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Despite those challenges, assets under management have increased in Hong Kong over the course of the year as markets have recovered following a dismal second half of 2018. Through Thursday's close, the benchmark Hang Seng Index has risen 3.9 per cent this year. The index has risen more than 8 per cent from its lows last October.

Assets under management for the Hong Kong hedge fund industry rose by US$6.9 billion year-to-date, driven mostly by performance growth as markets recovered this year from their lows, Eurekahedge said.

The benchmark Hang Seng Index has risen 3.9 per cent year to October 17. Photo: AP Photo alt=The benchmark Hang Seng Index has risen 3.9 per cent year to October 17. Photo: AP Photo

Hedge fund managers based in Hong Kong had their worst annual losses in 2018 since the global financial crisis, with the Eurekahedge Hong Kong Hedge Fund Index declining 8.49 per cent for the year. Aggressive rate increases by the Federal Reserve and trade tensions weighed on equity markets around the globe, especially those in the "Greater China region", Eurekahedge said.

"Risk sentiment on the region's hedge fund industry for the remainder of the year may also benefit from the dovish stance adopted by major central banks, and anticipation over further easing from the PBOC [People's Bank of China]," Eurekahedge said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.