Fund Towns: The Infrastructure Model For The Future Of The Chinese Hedge Fund Industry
The Chinese hedge fund industry is, when compared to those in North America and Europe, embryonic, but one which has experienced significant growth. The Asset Management Association of China (AMAC) only opened in June 2012, but at the end of 2017 boasted 8,467 members, managing RMB2.2trillion (US $362.8bn at February 1 2018) of assets.
Local municipalities in China have been quick to act to attract members of this fast-growing industry. One notable feature of the infrastructure of the industry in China are the so-called ‘fund towns’ – business districts built specifically to cater to certain industries.
Bruce McGuire, Managing Director of Global Alpha Research and President of The Connecticut Hedge Fund Association in Greenwich Connecticut, has, in the last 10 years, been hosting numerous delegations from different municipalities in China because they want to understand how such a concentration of hedge funds emerged in a location outside a large city. These delegations – consisting of government officials and fund managers themselves – are looking to the Greenwich model as a template for their own fund towns.
“The Chinese find it difficult to understand that Greenwich as a ‘fund town’ grew organically. The catalyst for the evolution of the hedge fund industry in Greenwich was that personal taxes were lower in Connecticut than in New York; unlike investment banking, hedge funds don’t need to be in a big city, so south-west Connecticut was an ideal location for these firms. Not only could they take advantage of the lower taxes, but when they needed to go to the offices of one of the prime brokers for investor meetings, they were only a 40-minute train ride away” said McGuire.
Yuhuang Shannan Fund Town, in the Shangcheng District of Hangzhou, China, about 175km from Shanghai – but only 40 minutes by bullet train – is one such place which is attempting to replicate the Greenwich model as it seeks to be front and center of the anticipated growth in the Chinese alternative investment space.
Hangzhou is the capital city of Zhejiang Province in south eastern China with a population of approximately 9million. It sits at the head of Hangzhou Bay, which separates Shanghai and Ningbo. Hangzhou grew to prominence as the southern terminus of the Grand Canal and has been one of the most prosperous cities in China for much of the last millennium, due in part to its natural scenery. The city's West Lake is its best-known scenic attraction and gives its name to the annual West Lake Summit on Alternative Investment Funds.
While emerging as an important fund and financial center, Hangzhou is already one of China’s technology hubs and is home to the e-commerce giant Alibaba. Furthermore, when China hosted its first ever G-20 summit in 2016, Hangzhou was selected as the host city, a big honor in this competitive and status conscious society, and a sign of Hangzhou’s political clout.
Local municipalities in China are in fierce competition to attract businesses and workers to increase their tax revenues. Shangchen district, where Yuhuang Shannan Fund Town is located, is building entire ecosystems clustered around the offices with international schools and a public transport system. Yuhuang Shannan had, at the end of October 2017, 2,361 fund management companies, managing assets of RMB1.0455trillion, according to Mr. Dagong Liu, Co-Head of Business Development for Yuhuang Shannan Fund Town Management Committee. Yuhuang Shannan doubled the number of companies, AUM and tax revenue (to more than RMB2.16billion) in 2017. He said that “in the future, the fund town will focus more on the quality of funds and will help funds to invest more in the real economy and enterprises, human resource development and risk control.”
Greenwich and Yuhuang Shannan Fund Town are formally connected through a sister city relationship signed between Shangcheng District, Hangzhou and Greenwich in 2017. McGuire says that this relationship will enable increasing cooperation between the two fund centers to promote industry best practice, mutual understanding and cross border deal flow.
According to McGuire, “China is opening up to foreign financial firms. The rules governing foreign ownership of brokerages and investment banks have been relaxed to allowing for the first time, foreign firms to be the majority owner. Similar ownership restrictions for asset managers have been eliminated completely allowing foreign fund companies to establish a wholly foreign owned entity or “WFOE”. We’re seeing some of our member firms in Connecticut looking at Yuhuang Shannan Fund Town as a possible location for a mainland China office. The closeness of the relationship has huge benefits, as the fund town can help with licensing, staffing and other office logistics that are critical to the process of getting set up in China.”
Does this have any impact on the clients of the hedge funds – the institutional and private investors? McGuire sees this less as a benefit to the end investor and more to the managers.
“I always try to make a point to visiting delegations that having a cluster of firms in one place makes it easier for asset owners and their consultants to meet multiple managers in one visit. However, the focus of the visiting delegations is much more focused on the day-to-day of the running of a fund management company – what impacts their time, their family, the general lifestyle.”
Competition is fierce. The Beijing Fund Town, located in the Fangshan District, southwest Beijing, is less than an hour’s drive to downtown Beijing’s Financial Street. Since May 2015, they have attracted 556 companies with an AUM of RMB1.1053trillion.
Similarly, Quanhai-Shenzhen-Hong Kong Fund town (QS-HK) – the self-styled ‘Fund Town China’ – has been signing up tenants since October 2016. The town boasts more than private funds; firms operating in the town also focus on wealth management, including Credit Suisse, HSBC and UBS. The town also has entered into agreements with the Luxembourg Stock Exchange to facilitate access to European capital markets for its members. In October 2017, Hong Kong asset manager BEA Union Investment Management, whose China office is based in QS-HK, received approval for a private fund management WFOE (Wholly Foreign-Owned Enterprise), the first in South China, and only the second free-trade zone to have a firm with a PFM WFOE after Lujiazui, the name of the financial district in Shanghai.
Ying Sun, Special Representative to China of the Connecticut Hedge Fund Association offered her thoughts.
“Each fund town has its own strengths, advantages and characteristics. QianTang River Financial Bay is the Zhejiang Province’s future plan for financial innovation and service economy transformation and upgrade. Yuhuang Shannan Fund Town plays an important role in that plan. Quanhai SZ-HK Fund Town is the first Fund Town in China’s Free Trade Zone to support technology innovation, financial innovation and attract global capital, with several impressive “firsts” - the first public fund with Hong Kong major shareholder, Hang Seng Qianhai Fund Management; the first security brokerage firm with a Hong Kong major shareholder, HSBC Qianhai Securities; and the first PFM-WFOE in South China BEA Union Investment Management (ShenZhen).”
Even more municipalities are looking to join the boom. McGuire hosted eight different delegations in 2017 and sees even greater interest lining up for 2018.
“It’s just the beginning for these fund towns. With the new ownership rules for foreign financial firms, they will be looking at the best options to send executives over from the west to set up shops on the Chinese mainland. The fund towns that emerge as the leaders will be the ones that not only provide the infrastructure to the firms to work, but the facilities that executives and their families want and need to live there.”