AlphaWeek Q&A: Bruce McGuire, President, Connecticut Hedge Fund Association
AlphaWeek’s Greg Winterton spoke with Bruce McGuire, President of the Connecticut Hedge Fund Association and Managing Partner of Global Alpha Research, about the evolution of the Chinese hedge fund industry and the role he plays in connecting the Chinese and Connecticut industries.
GW: Bruce, when was it that you began to realise that the Chinese asset management industry was emerging to be a global market, instead of just a local one?
BM: My first inkling that something was changing in the Chinese asset management industry (or that the China even had one!) came in early 2011. At that time, Greenwich, Connecticut was already known as the hedge fund capital of the world, and the Connecticut Hedge Fund Association, which I had founded with fellow Goldman Sachs Asset Management alumni was 7 years old.
I was contacted by an official from Shanghai asking to come and tour Greenwich and to meet with local hedge fund managers and town officials. When our visitors arrived that June, they explained that they were building a “fund town” in their district (FengXian District) as a clustering platform for Shanghai’s newly forming hedge fund industry, and that they wanted to use Greenwich – or as they dubbed it ‘Fund Town USA’ - as a model for their development plans.
Since that first visit, we have hosted a steady stream of visitors from all over China including Beijing, Hangzhou, ShenZhen, and Jiaxing. In each if these locations there are fund town initiatives similar to those in Shahghi’s FengXian area. As my relationships deepened, I have been invited to tour several of these fund towns including those in Shanghai, Beijing and Hangzhou. In May 2018, I will go to Shenzhen to attend the opening ceremony of the Shenzhen-Hong Kong fund town.
GW: Hedge funds in the west began by managing high net worth money before institutions really jumped in; it was then that the assets managed by the industry truly exploded. Are you seeing this mirrored in China?
BM: The investment market in China (both stocks and managed funds) is still very much a retail market dominated by individual investors. With regards to the amount of private wealth available for investment, we are witnessing explosive growth in the number of high net worth (HNWI) and Ultra High Net Worth Individuals (UHNWI) in China. According to a 2017 Bain & Company report, the number of Chinese with at least RMB 10 million (about US $1.5 million) in investable assets increased from approximately 180,000 in 2006 to nearly 1.6 million in 2016, representing a more than eight-fold expansion within just a decade. The number of UHNWI - those with at least RMB 100 million ($15 million) in investable assets) have grown at an even faster rate. There are now about 116,000 UHNWIs, in China, compared with just 7,000 in 2006. This emerging cohort needs financial products like never before.
GW: Entrepreneurship – as an industry and concept – is nearly as mature now in China as it is in the west. What are you seeing there?
BM: Certainly, entrepreneurship is thriving in China. A great example of this is in the technology sector where privately formed companies like Alibaba and Tencent have become global brands. In the asset management sector, we do not yet see a Chinese equivalent of BlackRock or Bridgewater, but the sector is growing rapidly. In June 2013, the “Funds Law” was extended to cover non-public funds (hedge funds),and that opened the floodgates. Since 2013, the number of Chinese hedge funds has exploded to a peak of 25,000. Many of these were shells or “phantom funds” that were not managing real assets and the Asset Management Association of China (AMAC) is in the process of shutting these down and raising the regulatory bar with new risk management and professional qualification requirements. But to return to your question, this illustrates that the entrepreneurial spirit is alive and well.
GW: What else is going to impact the growth of the Chinese hedge fund industry?
BM: I believe that more western awareness of Chinese capital markets (both the stock and bond markets) will impact the growth of Chinese hedge funds and asset management more broadly.
The Chinese equity market is already the second largest in the world, and the Chinese bond market is now number three. MSCI, recently announced that beginning in June 2018 it will include Chinese A shares in the MSCI Emerging Markets Index and the MSCI ACWI (All Country World) Index. With this, Chinese financial markets are becoming more and more relevant globally. The managers that will be best situated to manage Chinese stock and bond portfolios will be those in country with better access to information.
GW: How about western fund managers, how can they get into this picture?
BM: To be a truly global asset manager in the future, firms must have a presence in China…and I do mean mainland China and not simply Hong Kong. Some big western firms such as Aberdeen Standard, MAN Group in the UK and Fidelity and Bridgewater in the US have already begun this process. These firms understand the growing importance of China and the opportunity it presents for alpha generation and asset raising. In June of 2016 the laws were relaxed and for the first time made it possible for a foreign asset manager to set up shop in China without a joint venture partner. Firms taking advantage of these new policies can set up in China and receive a license as a Wholly Foreign-Owned Enterprise (WFOE).
GW: What have you got lined up for 2018 to continue facilitating the knowledge sharing between the Chinese and Connecticut hedge fund industries?
BM: Our 2018 initiatives include travelling to Shenzhen to attend the opening ceremony of the Shenzhen-Hong Kong Fund town, and working with the Hong Kong Exchange and China Merchant Securities to conduct US road shows to explain the China opportunity to our local fund managers. In addition, we are organising the Greenwich Forum conference as a sort of “Davos for hedge funds” and we hope to have many of our Chinese fiends in attendance. Finally I am speaking with local universities about creating a new executive level training program in “Hedge Fund Entreprenuership”, and we hope to have that ready by as early as this June. It is truly exciting to be witnessing this growth first hand, and to be playing a small part in it. Through the offices of the CTHFA as well as my firm, Global Alpha Research, I will continue to work on building bridges between China and the west.