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LONDON (Reuters) – A record drop in the Chinese currency in June yielded big dividends to some of the world's leading hedge funds, even though these trades do not reflect growing bets on an economic crash.
The world's second largest economy certainly has its problems . He is exposed in any escalation of his trade dispute with Washington and his massive debt pile has raised concerns about the health of his banks and state-owned companies.
And betting against his yuan, whether through offshore markets or currency derivatives, has been a favorite of hedge funds for years.
Having made big bets in 2015 and 2016, thinking that the Chinese economy was going to collapse, these funds felt the heat while the intervention of the central bank dampened the fall of the currency and made their trade in the short run too expensive.
While this game has faded since Beijing has allowed broader access to its onshore markets and tightened its grip, some hedge funds have continued to bet against the yuan for various reasons.
For Kevin Smith, investment director at Crescat Capital's hedge fund, the record-breaking 4% drop in the yuan against the dollar in June was the confirmation of a three-year wager that the Chinese currency would weaken.
After paying, she contributed to more than 80% of the company's 23% loss in 2017.
"We have been bearish on China for three years and have crossed the desert. It was something that really started for us in 2015 and is back for us now, "said Smith.
Crescat used options to maintain a lower cost position last year and maintains the theme of the devaluation of the yuan among the fund's best trades of $ 56 million.
"The options give us a way to stay in the game and have a substantial exposure when it finally moves and downgrades.Through our risk controls, we were able to stay in the race when a lot of things went wrong. other hedge funds … have really been eliminated. "
GRAPH – China Yuan Risk Reversal: reut.rs/2NCSeu5
DISPLACEMENT OF [19659014] During the summer 2015 and early In 2016, Hyman Capital and Corriente Advisors led the charge to bet against the Chinese economy via foreign exchange derivatives, which paid off when Beijing devalued the shock to stabilize its markets. Both funds declined to comment on current positions.
These transactions also peaked as Beijing's ambitions to encourage the use of its currency abroad fueled the claims that China would struggle to stem an avalanche of capital outflows following the collapse of its stock markets.
But since then, China has taken steps to improve markets and allow better access to foreigners by launching investment channels between its major stock exchanges in Shanghai and Hong Kong.
"For hedge funds, the world has gone from haphazard devaluation to China," said Stephen Coltman, a senior investment manager of the investment strategy team. investment of Aberdeen Standard Investments. While currency-specific funds were still evolving in the yuan, macro-hedge funds – which bet on the macro movements of equities, indices, rates and currencies – were largely absent. This can be seen in the offshore derivatives market in undeliverable futures, which did not value the massive depreciation of the yuan, Coltman said. The futures prices on the one-year contracts in off-shore yuan show a 56 pips discount from the spot level, but in early 2016, the haircut was over 350 pips due to a Sudden slowdown of convulsed markets in China. Although the risk evolution over a month and three months, the ratio of put to call, slightly higher in recent days compared to the yuan, remains well below the levels of the third quarter 2015 and early 2016. The Yuan movements were also more orderly this time. As trade tensions between the world's two largest economies intensified, the People's Bank of China let the renminbi weaken by nearly 5% over 11 trading sessions from mid-June to a low of around $ 10 billion. August 2017 of 6.7204 yuan for one dollar. The currency now stands near the lows of one year. Contrary to the fears of a "hard landing" in 2015, most investors believe that the Chinese economy is strong and that the weaknesses of the yuan could be only a tool for loosening the parallel to targeted reductions in reserve requirements. "Our big data indicators in the field indicate an upside risk for the consensus on economic activity," said Isabelle Mateos y Lago, multi-asset strategist at the BlackRock Investment Institute in London.
GRAPH – Spread Between Offshore and Spot Rates: reut.rs/2L9rG1V
& # 39; POSITIONS OF NOSE-LOSSES & # 39;
Most importantly, the cost of running yuan short positions made bets against Beijing a dear bargain. With the improvement of access to onshore markets, a pool of yuan down – 600 billion yuan ($ 90 billion) compared with more than 1 trillion yuan in December 2014 – short sellers are vulnerable to sudden spikes in day-to-day financing costs. times last year.
Even taking the route of foreign exchange derivatives is relatively expensive. Implied volatility on the offshore yuan, a key factor for pricing options, is greater than that of its Asian counterparts.
"These are positions that bleed for months and can hurt performance," said Kenneth Broux, FX strategist at Société Générale in London.
China-focused hedge funds fell 4.18% in June, compared to their global counterparts, which posted stable returns over this period, according to Eurekahedge data.
Kaspar Hense, a member of Bluebay Asset Management, was late in joining. He began selling the offshore yuan at $ 6.45 last month, believing that Beijing would accept the inflationary impact of a weaker currency.
While the fall of the yuan has made his position much more profitable than expectations, he is not afraid that it will skid and trigger an avalanche of capital outflows.
"We do not believe that the Chinese economy is in danger and the monetary losses are much more manageable for the decision-makers this time," he told the Mayfair Fund which manages $ 60 billion .
Douglas Greenig, founder of Florin Court Capital, said he took advantage of rising and falling currencies in 2017 and 2018, as his models of quantitative funds painted the market for trend prices and then took advantage of them. .
"Positioning seems much less extreme than (before) … When positioning is extended, there are fewer people to enter the trade and push the trend further."
GRAPHIC – RMB deposits in Hong Kong: reut.
($ 1 = 6.6666 Chinese renminbi yuan)
Report by Simon Jessop and Saikat Chatterjee, additional report by Maiya Keidan; Editing by Sujata Rao and John Stonestreet
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