Inefficient China A share market is a haven for Asia hedge funds

Adolfo Oliete from UBS Hedge Fund Solutions explains that the inefficiency in the China A share markets can create unique opportunities for hedge funds investors in Asia.

02 Dec 2019

How are the China A share markets inefficient?

One the best way to illustrate how inefficient this market is, is to compare the research coverage of stocks across markets.

The China A-share market is the second largest equity market in the world and one of the most liquid. Yet analyst coverage of stocks remain low. Approximately 70% of the A-share stocks are covered by fewer than three analysts. This contrasts with the US and Europe where only 15% of stocks have such limited analytical coverage.

It is no coincidence that single stock dispersion, a measure of the opportunity for active managers to add value, is therefore nearly double in the Chinese equity market than it is in Europe and the US.

Higher stock dispersion can lead to more alpha opportunities

Adolfo explains that "higher dispersion (of stocks) tends to lead to more alpha opportunities, and especially for hedge funds that are certainly a little bit more active, they can take advantage of dislocations and moves."

Inefficiency causes high stock dispersion in China equity markets1

Hear Adolfo explain

Asia is a high conviction trade where we have allocated a significant amount of money in the last four years

Adolfo Oliete

Head of Asia-Pacific Investments
UBS Hedge Fund Solutions

Keen to start a conversation on Asia hedge fund investing?


Comments dated 11 March 2020

Impact of COVID-19

From a UBS Hedge Fund Solutions perspective, it's worth noting that hedge funds are generally protecting capital in the period despite significant risk premium widening across markets.

The historic volatility in US rates has driven some mark-to-market losses in Fixed Income Relative Value, but repo financing has been stable, enabling managers to hold positions.

APAC has been a bright spot for performance as offshore China long / short hedge funds are positive to date in the month of March.

We believe that the Energy sector is likely to go through a difficult period with escalated default activity. In addition to Covid-19 demand destruction and the OPEC driven oil selloff, ESG is a secular factor that is limiting the amount of bank financing and speculative capital for fossil fuel companies. We will likely see an interesting opportunity in energy credit as the "baby gets thrown out with bathwater."

Finally, in our view much of the spread widening in Relative Value strategies, like merger arbitrage, is mark-to-market and likely to rebound.

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