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China’s prototype sunshine hedge funds in peril

Thursday, December 20, 2012

From Precy Dumlao, Opalesque Asia – A thick cloud shrouds China’s prototype hedge funds, or so-called sunshine funds after seeing record liquidations this year, reported AsianInvestor.net.

However, insiders believe that the estimated 1,800 sunshine funds across China could rebound next year, benefiting from fresh regulations Beijing is set to implement in 2013. According to the report, the new regulations will bring flexibility in investment strategy compared to mutual funds because they will not be required to invest 60% of their portfolio in equity strategies and also allow such funds to raise their cash positions to evade risk.

Although the sunshine fund serves as a prototype of China’s hedge fund space, their remit is very limited, including the strategies they can use. The sunshine funds are not allowed to use strategies such as long/short and market neutral.

The limited strategy makes such funds vulnerable to volatile markets. Year-to-date, sunshine fund liquidations totaled 117 compared to 111 from 2011. Most of the liquidations are a result of poor performance, it was reported.

The report quoted Long Fang, managing director of West Brothers Fund Manager Research Centre as saying, "Sunshine funds beat the market in two ways: good stock-picking that can beat the benchmark, and good timing which can ease downside risk. These help the......................

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