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Alternative Market Briefing

Alpha potential for Chinese L/S equity hedge funds

Wednesday, December 04, 2019

Laxman Pai, Opalesque Asia:

There are structural reasons as to why Chinese equities could provide a fertile ground for alpha. First, flows into China could support both beta and alpha, said Lyxor in its weekly brief.

China accounts for only 8.5% of the world market cap, in contrast with its 16% share of the world GDP or 10% of world capex.

A widening market access and a heavier share of China in EM and global indices could attract flows. Second, market depth, essential for alpha, could improve due to a richer set of businesses, types of investors, corporate operations.

The current alpha backdrop could improve in a trade truce scenario

Alpha generation has been volatile over the last two years, impaired by the dominance of trade and tech wars.

Poor fundamental pricing is apparent in the high share of stock moves attributable to broad markets. Yet, multiple themes and uneven impacts from trade policies result in low stock correlation, limited sector leadership, and greater price discrimination.

"Besides, stocks are cheaper providing stock-picking potential. Moreover, prospects of a trade truce are opening fresh opportunities, while our tactical indicators do not point to a major risk of reversal," the report said.

In a trickier backdrop, managers favor cautious exposures (......................

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