The Hidden Hedge Fund Villages of China

When Ray Dalio moved Bridgewater Associates from the hustle and bustle of New York City to the quaint small town of Westport, Connecticut in 1981 he didn’t know that 35 years later he’d be starting a trend — halfway across the world.

Yuhuang Shannan in China has been taken over by the financial industry. This town, just outside the big city of Hangzhou and about an hour by train from Shanghai, has become the hedge fund capital of China.

After its official rebranding from Yuhuang Shannan to the not so creative Yuhuang Shanna Fund Town more than 1000 hedge funds and private equity funds have taken up shop in the village. Combined, these funds are valued at over $84 billion.

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How Did This Happen?

Almost overnight, this little village has become home to more wealth than all but Shanghai, Beijing and Shenzhen. The effects can be traced back to the Chinese government’s decision to recognize hedge funds in 2012.

Before this, there was no complete definition of what a hedge fund was in the country. Before 2012, there were 2 markets for hedge funds.

In one corner, there were the big asset management companies that were involved in domestic hedge fund strategies. These hedge funds would have to be approved by the China Securities Regulatory Commission, and are tightly regulated funds that only the wealthiest of Chinese people have access to.

In the other corner, you had unregulated private fund managers operating what are being called “sunshine private funds”. Despite the name, these are basically unregulated hedge funds, preferring to operate in the shadows.

After the new 2012 law, hedge funds became legal.

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What is a Hedge Fund?

Hedge Funds are companies that pool money from investors — you have a hedge fund manager who’s in charge and makes the decisions on where the money is going to be invested. The difference between a hedge fund, and say, a mutual fund, is that hedge funds have more exotic strategies at their disposal and aren’t regulated as strictly.

In the United States, you have to have a certain amount of money (read: a lot of money) before you can put your money into a hedge fund.

The Town

Yuhuang Shannan is one of about 15 other hedge fund towns across the Chinese landscape. Yuhuang Shannan has, itself, interesting history. From rural, farmland beginnings, the Chinese government decided to turn the town, first, into a tourism zone, and second, into a hub for the design industry.

Neither decision really paid off the government. It wasn’t until the government heard about the hedge funds in Connecticut did they decide to create this Chinese hedge fund enclave, accessible to residents and guests only througha guarded entrance.

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                                                    Source: Bloomberg

Global Crisis?

These hedge fund villages come at a time when the hedge fund industry has suffered some losses. Around the world, consumers are taking money out of their hedge funds. The returns haven’t been very strong in the hedge fund domain which has caused $70 billion worth of withdrawals. More locally, Chinese hedge funds also lost money last year but the number of registered hedge funds hit record numbers. The Chinese people aren’t staying away from this nascent sector.

Differences between American and Chinese Hedge Funds

Hedge fund strategies that work in America and Western Europe aren’t necessarily the same strategies to pursue in Asia. The markets in Asia are different, they generally have lower liquidity, higher market volatility and, as noted earlier, different legal and regulatory restrictions.

Chinese hedge funds are generally smaller than their American counterparts, and it’s easier to invest in them. The minimum investment in China is about $161,000 while it’s closer to a million stateside. The whole Chinese hedge fund industry has assets under management (AUM) of $400 billion; that number stands at over 3 trillion for the U.S.

Clearly, there’s more room for the hedge fund bubble to grow. The Chinese Government will have their eyes tightly fixed on Yuhuang Shannan Fund Town. It’s a new development, but one that might yet holdbig returns for investors and the Chinese elite.

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