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February 13, 2019  

Stars Aligning for China Equity Manager

After seeing its business crimped by regulations, Shanghai ShenYi Investment is positioning itself for an expansion.

The growth would come in part through a systematic equity vehicle called China Arbitrage Fund through which the $400 million Shanghai firm is aiming to raise capital from investors outside China for the first time. That entity currently manages $2 million of partner capital and is about to add $15 million in the form of a separate account for a large U.S. institution.

With the assistance of placement agent Protocol Capital, ShenYi met with some 45 investors, including many heavy hitters, in a roadshow that included Context Summits’ “Miami 2019” conference, which took place Jan. 30-Feb. 1 in Miami Beach. From there, the firm visited Chicago and New York. It also is planning a trip to Europe.

The Cayman Islands-domiciled China Arbitrage Fund started trading in November. ShenYi is pitching the market-neutral vehicle as giving limited partners exposure to China stocks while hedging against volatility by short selling indices and individual equities. In doing so, the firm is replicating a strategy through which it already runs $360 million for investors at home.

That program is expanding as well, with ShenYi expecting to have more than $1 billion under management by yearend.

The main China strategy, which is one of the longest-running and best known of its kind, launched in September 2011. From 2012 to 2015, it generated an average annual return of 18.3%, with double-digit gains each year. But as China’s stock market tumbled in 2015 and 2016, the China Securities Regulatory Commission all but banned short sales and imposed strict margin limitations.

Those changes disrupted ShenYi’s approach, in part causing its returns to cool off to 3.2% in 2016, 5.8% in 2017 and 3.1% in 2018.

Around the same time, China-based banks and insurers pulled capital from hedge funds in anticipation of rules blocking their exposures to such products. Combined with the firm’s more-modest returns, those changes caused ShenYi’s assets to fall to their current level from $1.6 billion in 2016.

But China Arbitrage Fund isn’t subject to the country’s hedging controls thanks to its use of the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect systems. Those channels allow trading of China stocks on the Shanghai Stock Exchange and Shenzhen Stock Exchange by funds with prime brokers in Hong Kong, in a format that makes foreign capital easily accessible.

Under that approach, ShenYi is touting back-tested performance that included profits of 23.1% in 2016, 33.6% in 2017 and 16.9% in 2018.

As it happens, the China Financial Futures Exchange said in December it is increasing the short-selling index products that can be traded under its umbrella while reducing margin requirements. And the State Administration of Foreign Exchange has doubled the amount of capital that “qualified foreign institutional investors” can invest in China’s financial markets, to $300 billion annually. To that end, ShenYi also is seeking to set up separate accounts for foreign investors via its main China program.

It additionally anticipates heavy inflows resulting from a 2018 China Banking and Insurance Regulatory Commission decision under which asset-management units of financial institutions at home will be able to invest in hedge funds. The firm also runs a long-only portfolio.

Chief executive Shen “Sonny” Yi founded ShenYi in 2004. He previously was a portfolio manager at Millennium Management and led a proprietary trading group at Goldman Sachs. The firm’s chief operating officer is Eric Tsang, who arrived in 2008 from a quantitative-trading group at Goldman Sachs Asset Management.