History of China's Private Funds-Twenty Years in Retrospect(Year 2011)

The Seven-Year Itch

The year 2011 began with a sense of foreboding. The Shanghai Composite Index, opening at 2,825.33 points, seemed to teeter precariously, a harbinger of the storm to come. By year's end, it would crash down to 2,199.42 points, a brutal 21.68% decline that ranked sixth among major global indices. The carnage was reminiscent of the 2008 crisis, leaving investors reeling and questioning their faith in the markets.

Yet, amidst the wreckage, a different story was unfolding in the private funds industry. The industry, defying the broader market gloom, surpassed the CNY 200 billion($27.85 billion) AUM mark, a staggering 150% increase year-on-year. Sunshine hedge funds continued their meteoric rise, with the Trust of Trusts (TOT, early form of China FOF) structure gaining widespread acceptance. Banks, trust companies, Securities firms, and third-party institutions all rushed to capitalize on this innovative business, creating a vibrant and increasingly competitive landscape.

The allure of private equity, particularly venture capital and buyout funds, intensified as investors sought refuge from the volatile secondary markets. The promise of clear exit strategies and high returns attracted a flood of capital, both institutional and individual, further fueling the industry's growth. However, this influx of capital also had its downsides, contributing to inflated asset prices and intensifying competition for deals.

The year 2011 marked a turning point for the industry, a "seven-year itch" that separated the wheat from the chaff. Many smaller private funds firms, ill-equipped to navigate the increasingly complex and competitive landscape, struggled to survive. The industry was on the cusp of a major shakeout, with only the strongest and most adaptable firms poised to emerge from the turmoil.

The meteoric rise of Noah Holdings, a wealth management firm listed on the US stock market, captured the zeitgeist of the era. Reaching a market capitalization of US$10 billion at its peak, Noah's success highlighted the growing appetite for alternative investments among China's burgeoning affluent class. Inspired by Noah's success, a wave of third-party wealth management firms emerged, eager to tap into this lucrative market.

At the same time, the regulatory landscape continued to evolve. The China Securities Regulatory Commission announced plans to introduce a new license for fund distributors, signaling its intention to regulate the rapidly growing wealth management industry. Third-party wealth managers, no longer content with simply distributing products, began to vertically integrate their operations, establishing their own asset management arms to complement their distribution capabilities. The lines between different segments of the financial industry were blurring, creating both opportunities and challenges for market participants.

With the decision of CSRC, China Securities Finance Co., Ltd. (hereinafter “CSF”), as a financial institution specialized in securities, jointly founded by Shanghai Stock Exchange , Shenzhen Stock Exchange and China Securities Depository & Clearing Corporation Limited , was incorporated on October 28, 2011. It aimed to facilitate the margin transactions of securities companies in market operation methods, improve China’s margin transactions system, complete the functions of China’s capital market, and promote the stable development of the same.

Despite the market turmoil, China onshore hedge funds once again demonstrated their ability to deliver alpha. The average annual return for funds with a track record of at least one year was -16.47%, with 51 funds managing to stay in positive territory. This performance, while sobering compared to previous years, far surpassed the -25.59% return of the benchmark equity mutual funds.

The year 2011 was a time of reckoning for the A-share market. The growth-driven rally, fueled by the rise of the ChiNext board, came to a crashing halt. The bubble burst, exposing the fragility of many high-flying companies and leaving investors nursing heavy losses. Value investing, long overshadowed by the allure of growth, made a comeback, as investors sought refuge in companies with strong fundamentals and a history of profitability.

The Bosera Asset Management Co. Growth Fund(F.010902), managed by Xia Chun of Bosera Fund Management, emerged as an unlikely champion, limiting losses to 7.94% for the year. Xia's disciplined approach and focus on undervalued blue-chip companies provided a stark contrast to the high-octane growth strategies that had dominated the market in previous years.

As the year drew to a close, a sense of uncertainty hung in the air. The Chinese economy, facing headwinds both domestically and globally, was entering a period of transition. The private equity industry, though battle-scarred but unbowed, stood ready to adapt and evolve, its future inextricably linked to the fortunes of the market it sought to master. The road ahead promised to be fraught with challenges, but also with opportunities for those with the vision and fortitude to seize them.

(To be continued...)