Funds in HK adopt moves to cope with mainland markets’ shocks
Print Edition
China’s mainland-focused funds in Hong Kong are adopting measures to improve how they cope with liquidity shocks from mainland markets after the securities regulator found some investors were unfairly treated during last year’s market rout.
More than half of the mainland’s listed firms suspended trading in their stocks at the height of the slump in July, which made it hard for fund managers to value their portfolios and meet a flood of redemptions from investors eager to cut their losses.
Fund managers are once again on notice of potential redemptions. After a brief respite from last year’s fall, mainland stocks so far in 2016 have dropped about 25 percent, wiping off 13 trillion yuan (US$2 trillion) in market capitalization.
Inspections by Hong Kong’s Securities and Futures Commission last year found many funds did not have rigorous processes for valuing their portfolios in the extreme conditions, people with knowledge of the discussions between the regulator and industry said.
“This meant some investors were able to redeem at a higher price than they should have, leaving those left in the fund with a lower price. This is raising alarm bells,” said Stewart Aldcroft, chief executive of CitiTrust, which acts as a trustee to several Hong Kong funds and has been involved in industry discussions on the matter.
Following the inspections and faced with waning investor confidence, hedge funds, asset managers and exchange-traded funds now hold more cash, so it is easier to meet redemption requests at times of stress.
Asset managers, including Allianz Global Investors and BNP Paribas Investment Partners, are increasing their use of the stock connect scheme, a trading mechanism that allows funds in Hong Kong to adjust positions in Shanghai’s stock markets more rapidly than using China’s other investment channels.
Some funds are also introducing stricter policies on valuing stocks that have halted trading and on managing redemptions.
Mainland stocks dropped around 40 percent in just a few months last year, prompting investors to rush for the exits.
The SFC found that during the slump many funds did not have an orderly process for handling redemptions. They chose not to use measures that could have alleviated liquidity stress, such as capping daily redemptions or suspending them altogether, fearing such action would damage their reputation.
This meant investors left at the back of the redemption queue, or who did not redeem their investments at all, were sometimes left holding illiquid stocks — a situation the SFC believes may constitute unfair treatment, fund managers said.
“Suspension of trading in a fund when a certain amount of underlying stocks are halted and better market liquidity are necessary to boost investor confidence,” said Tobias Bland, chief executive of asset-management firm Enhanced Investment Products in Hong Kong.
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