Opinion: Global hedge fund managers enter Shanghai
November 15, 2013 | BY
clpstaff &clp articles &Despite any formal announcement or regulations, the qualified domestic limited partner programme is underway in Shanghai. Hubert Tse looks at the programme and how it aligns with Shanghai's goal of becoming a global financial centre
After two years waiting and much anticipation, the Shanghai Qualified Domestic Limited Partner (QDLP) programme was finally launched in July 2013. Even though the Shanghai Finance Office (SFO), which oversees the QDLP, has not issued a formal announcement to date, it has been reported in Chinese and international media that six global hedge fund managers were awarded the QDLP licence – Och Ziff, Citadel, Oaktree, Canyon, Man and Winton. Each has been awarded a quota of $50 million (less than many people expected) to invest the QDLP proceeds in offshore funds. Sources say that most if not all of these managers have experience in or are currently managing money for Beijing.
Under the QDLP programme, global hedge fund managers are permitted to raise funds from Chinese investors (high net worth individuals and large-sized institutional investors) in China and invest the proceeds in offshore hedge funds. The QDLP regulations have not been publicly released, but it is said that global managers are required to establish the manager entity and the fund LLP in Shanghai to qualify for the pilot programme – they can, however, fundraise from investors China-wide. To qualify as QDLPs, managers are said to need to be equipped with an assets under management (AUM) of $10 billion or above, a good track record and a stellar reputation in the global hedge fund industry.
Most of the QDLPs are said to have already established their Shanghai manager entity and are currently working on securing investor commitment by partnering with domestic private banks and trust companies. It may be some time before the fundraising could be completed and the proceeds start being invested offshore. Until then, it is unlikely that the next rounds of QDLPs would be approved as the SFO may want to closely monitor the performance of the approved QDLPs first.
The QDLP is significant in the sense that it is the first time ever that any foreign financial institutions (let alone hedge funds) have been permitted to raise money from domestic investors in China and invest these proceeds offshore. It is the only legally prescribed channel for global hedge fund managers to enter the Chinese hedge fund market. Under the pilot programme, global managers can look to build brands and network, acquire first hand information and knowledge and secure first mover advantage in the Chinese market, which may also benefit their non-QDLP businesses. The QDLP will for the first time give Chinese individuals and institutional investors formal access to investing their money abroad with global hedge funds.
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Shanghai 2020: A global financial centre
In 2009, the State Council issued the so-called Shanghai 2020 policy under which Shanghai is to become an international financial centre commensurate with the economic strength of China and the global status of the renminbi by the year 2020. As part of China's 12th Five Year Plan, Shanghai is to also develop into a global asset management centre by 2020. Since then, we have seen the launch of the QDLP, the China (Shanghai) Pilot Free Trade Zone and the Shanghai Hongkou Hedge Fund Park.
For Shanghai to become a global financial centre on a par with New York and London in the long run, building a world class hedge fund industry is of paramount importance. The QDLP aims to bring together the world's best and largest global hedge fund managers and attract global and local talents to Shanghai to help build the growing Chinese hedge fund industry. The Shanghai 2020 programme has national strategic backing of which the QDLP forms an integral part.
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What to expect
It remains to be seen how the QDLP scheme will turn out, but nevertheless its launch is a positive move by the Shanghai authorities, despite rumours of its abandonment in early 2013. The SFO will certainly keep a close eye on QDLP performance going forward and will accordingly expand its size and quotas. The QDLP launch shows the SFO's determination to build Shanghai into a regional hedge fund centre. But in order for Shanghai to become a truly global hedge fund hub, a lot more needs to be done to get there – renminbi conversion, favourable taxes, capital account opening and easing on foreign investments in domestic financial markets, all of which cannot be resolved by Shanghai alone.
We should look forward to Shanghai launching more hedge fund programmes in the coming years as the city looks to catch up with its regional and global rivals in becoming a major international financial centre. This day may arrive a lot earlier than many people anticipate as China moves ahead to becoming the world's largest economy and as the renminbi marches towards global reserve currency status – alongside the Dollar and the Euro – by the turn of this decade.
Hubert Tse, Boss & Young, Shanghai
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