Asia credit investors feel the pain of China property exposure
HONG KONG : China's crisis-hit property sector has driven underperformance this year in some Asia-focused credit funds, including one led by a former Lehman Brothers portfolio manager, pummelledling their returns and bringing years of gains to a juddering halt.
Hong Kong-based L&R Capital's Asia Credit Alpha Fund, a hedge fund with more than half of its geographical exposure focused on China, slumped by 18.9 per cent in 2022 as of end-May, according to documents seen by Reuters and a person familiar with the matter.
The fund, led by former Lehman Brothers portfolio manager Li Ran, retreated another 4 per cent in June. The downbeat performance looks set to end the fund's four-year winning streak since inception, showed the documents.
Its losses were partly a result of its exposure to Chinese property developers as sector-wide pain engulfed even companies with stronger credit profiles, according to the person.
The fund's exposure to the overall property industry shrank to 22 per cent by the end of May from 33 per cent at the beginning of this year, the documents show.
L&R's performance rout shows how even seasoned investment managers are struggling to navigate China's devastating property sector crisis.
China's property sector, a key pillar of the world's second-largest economy, has lurched from one crisis to another and has been a major drag on economic growth over the past year. It has seen a string of defaults by debt-squeezed developers.
Prudence Investment Management, a Hong Kong-based hedge fund specialising in China-related credit investments, saw its flagship fund drop 2.5 per cent by end-June, a performance described as "decent" by peers, according to a separate person familiar with the matter and documents reviewed by Reuters.
The fund managed to pare some losses after March as it turned more neutral on the property sector and diversified to other areas, according to the person.
L&R Capital did not respond to queries. Prudence declined to comment.
All the sources declined to be named as they were not authorised to speak to the media.
Kenny Chung, portfolio manager of Astera Capital Partners, which manages a Hong Kong based fixed-income hedge fund, said he hasn't seen "a more challenging investment environment for at least 10 years".
The fund managed to return 4.2 per cent by June, mainly benefiting from net shorting China property developers early in the year and diversification to other regions later.
The damage in the mutual funds space has been just as severe.
The biggest 10 Asian high-yield mutual funds have posted hefty losses, all above 25 per cent by the end of June, partly hit by their exposure to Chinese property developers, data compiled by Morningstar showed.
The Fidelity Asian High Yield Fund saw its size shrink by 40 per cent this year to $2.4 billion at end-June, as its returns crumbled by 34.2 per cent in the first six months.
Its China exposure stood at around 31.2 per cent by the end of June, compared to 37.9 per cent at end-December, the data showed.
Fidelity did not respond to queries.
"Before the crash of the Chinese property developers, all of these Asian high yield funds were very heavily invested in the sector…those trimmed their China exposure earlier this year have fared better," said Patrick Ge, senior analyst with Morningstar.
