A major hedge fund in China that cut its domestic stock exposure to zero expects returns to be worse than in 2008

A major hedge fund in China that cut its domestic stock exposure to zero expects returns to be worse than in 2008
Patients are transferred to the emergency ward of Shanghai Tongren Hospital after Shanghai imposed a citywide lockdown to halt the spread of COVID-19Yin Liqin/China News Service via Getty Images
  • Shanghai Banxia Investment Management Center slashed its Chinese stock holdings to zero, Bloomberg reported.
  • The hedge fund's founder said fears around COVID, Russia-Ukraine, and Fed rate hikes make 2022 worse than 2008 for returns.

A top hedge fund in China that has virtually no exposure to domestic stocks right now expects this year to be the toughest for asset managers in well over a decade, thanks to war in Ukraine, rising US interest rates, ongoing COVID outbreaks, particularly in China, Bloomberg reported on Monday.

Shanghai Banxia Investment Management Center founder Li Bei said COVID, Russia-Ukraine, and the Federal Reserve's rate hikes would make this year tougher for fund managers to get returns than 2008.

"This year is more uncertain," Li said in a WeChat post Monday. "The outbreak of war and the development of the epidemic in China this year have brought a lot of uncertainty."

Shanghai has been under a strict lockdown since late March amid a surge of COVID cases. Authorities put up fences around some residences in the city and closed some streets, as mass testing in Beijing also led to fears of a lockdown.

Chinese health officials stood by the "zero-Covid" policy. That means rapid lockdowns, mass testing, and travel restrictions.


Li said that along with the ongoing Russia-Ukraine war, the Fed's strategy of rapidly raising interest rates from historic lows would add to the challenge, particularly for investors in long-dated fixed income.

Banxia's exposure to Chinese stocks was almost nothing at the end of last year, Li said, adding that this was not unusual given the market environment.

"As a hedge fund that pursues absolute returns, this is not uncommon. It is normal to take a long position when there is an opportunity, and not to do it when there is no opportunity," she said.

"I'm not saying the economy is more difficult or that there will be a financial crisis. I'm just saying that this year is more difficult for fund managers to get yield," she said.

So far this year, Shanghai's benchmark CSI 300 index has fallen by almost 23%, compared with a decline of 11% in the S&P 500, a drop of 7.6% in the Nikkei and a fall of 8.4% in the pan-European Stoxx 600.


Fed officials, including Chair Jerome Powell, signaled the central bank is likely to raise US interest rates by 50 basis points next month to bring inflation, which is running at its hottest in over 40 years, under control.

Investors largely expect the Fed to raise rates by 50 basis points at its next three policy meetings and there is a growing risk that this could hurt economic growth.

Regarding her fund's net stock position being reduced to zero, Li said, "As a hedge fund pursuing absolute returns, this is not a strange thing. It is normal to have more positions if you have a chance, and if there is no chance, you won't do it."

China's strict lockdowns have created concern about the outlook for global energy demand, as well as more problems in the global supply chain.

"More lockdowns reduce demand for commodities in the short-term which is an easing factor for commodity inflation, but lockdowns also create bottlenecks in the world's factory which causes more delays and potentially inflation in consumer markets in the US and Europe," strategists at Saxo Bank told clients in a note.


She said that, despite the difficulties, the war and COVID pandemic are in a more stable period and that risks in stock markets are getting smaller.

"Stocks are nothing more than a problem of correct pricing. As long as the price fully sets the risk of economic downturn, even if the economy really declines, it will not necessarily fall sharply."