UBS and Unsystematic Selection Hurts Chinese Fund Industry

Fund of funds are becoming critical in China’s domestic market for diversification and, in particular, hedge fund exposure. But unsystematic performance-chasing from market players do not inspire confidence, UBS Asset Management said.

Since the fund of fund (FoF) investment philosophy in the domestic market is at a relatively early stage, we see that some FoFs just invest in the top-ranking fund managers based on performance, Shanghai-based fund manager at UBS Asset Management Xia Kun shared.

In these instances, we believe that the selection for managers is not systematic with insufficient strategic diversification and active management. It is difficult for an FoF to show its features and advantages of diversification when countering market fluctuation, which may have a negative impact on investor’s recognition and acceptance of such a product.

According to Xia, demand for FoFs is rising due to the growing need for general asset allocation and hedge fund exposure – a key aspect for onshore investors that may have limited to options to protect against the local market downside. But he adds that the universe of strategies is complex and the liquidity covenants are cumbersome, setting a high barrier for investors that lack resources and skill.

Demand for high-quality actively-managed fund products has burgeoned in line with the implementation of the new asset management regulations that call for a shift from guaranteed-return to NAV-based products in China, Xia explained.

He cites recent calls by authorities to tighten the wealth management industry in China in an effort to create greater discipline amongst creditors, debtors, distributors, and investors.

UBS Asset Management recently launched its A&Q China Diversified Fund of Funds in Shanghai to provide what it envisions as an «all-weather» portfolio to provide alternative beta sources. The funds invests in established and emerging managers across equity fundamental, commodity (CTA) and quant equity funds. It is looking to add more managers, especially for fixed income strategies.

We believe the unique positioning of this onshore fund to better satisfy investors’ demand and our expertise in the area will help build the scale in the local market over time.