Hedge Funds Spawned by Hillhouse Burned in China Tech Crash

For years, it’s been one of the best calling cards that hedge fund startups in Asia could ask for: getting support from billionaire Zhang Lei or gaining experience at his Hillhouse Capital Group .

After leveraging that Hillhouse pedigree to raise a combined $20 billion, the offshoot funds are losing some of their luster. Most have posted double-digit declines this year on the same Chinese tech, consumer and health-care sectors that Hillhouse itself backed to mint so many millionaires. Zhang Lei None of the nine Hillhouse next-generation funds Bloomberg tracked has been spared. Franchise Capital Management lost two-thirds of its value in the 14 months to April, according to a newsletter sent to investors. Brilliance Asset Management’s flagship fund dropped 27% in the first four months of 2022, according to people familiar with the matter, while a retail version dropped 47% from a February 2021 peak to June 2. CoreView Capital Management and Snow Lake Capital also had losses.

While most funds with sizable China exposure have suffered, the Hillhouse offshoots have been particularly hard hit. Several of them easily exceeded the 9% drop in a Eurekahedge index for the first four months of the year. That same gauge that tracks Asia stock hedge funds eked out a gain in 2021, unlike half of the Hillhouse progeny.

“Some hedge funds were early to grasp the opportunities in tech stocks — unfortunately, many held on for far too long when fortunes turned against them,” said Andrew Beer, founder of New York-based Dynamic Beta Investments, which seeks to replicate hedge fund returns. “The shocking magnitude of drawdowns among some stock-picking hedge funds calls into question whether they were ever hedged at all.”

The losses are a painful reversal for the funds, which have had success in recent years in part by focusing on some of the same industries as Hillhouse, the investment giant Zhang founded 17 years ago with $30 million from Yale University’s endowment fund.

Thanks to winning bets on firms like JD.com Inc., Meituan , Sea Ltd. , Tencent Holdings Ltd. and Zoom Video Communications Inc. , Hillhouse — named after a street on the Yale campus — became an investment behemoth with $106 billion in assets at the end of 2021. That makes it one of the biggest asset managers in Asia.

Given Zhang’s track record, a Hillhouse connection helped hedge fund entrepreneurs start their own firms, much like the Tiger Cubs in the US, whose founders cut their teeth at Julian Robertson’s Tiger Management. (The Tiger Cubs are also getting whacked this year by the tech plunge.)

Like Hillhouse, the funds know their industries inside-out, according to an investor with knowledge of most of them. When confronted with corrections in core positions, they have tended to dig in or double down rather than cut losses and flee like more active-trading rivals.

The funds often share Hillhouse’s fondness for long-term, gutsy bets, and it’s not unusual for them to select stocks like JD.com and GDS Holdings Ltd. that have counted Hillhouse as a top shareholder, according to regulatory filings since June 2021. Until recently, that’s been a winning formula, with some of the acolyte funds posting returns as high as 203% in better years.

That strategy is now being put to the test by policy shifts. Chinese stocks in industries from e-commerce to tutoring have been hammered by regulatory tightening, while the US has threatened to delist Chinese companies over access to audits. These moves, combined with a global tech rout, have contributed to a 67% drop in the Nasdaq Golden Dragon China Index since February 2021. The index has rebounded from a nine-year low in March, providing potential relief to the funds. China Bets

The Hillhouse offsprings’ bets such as TAL Education Group , New Oriental Education & Technology Group Inc. and Chinese cosmetics company Yatsen Holding Ltd. have lost more than 90% of their value in the past 16 months, among the biggest decliners of the Golden Dragon gauge.

“Hedge fund managers are paid a ton precisely because investors expect them to step off the tracks before the train hits,” said Beer. “Here, it looks like a whole group of funds was convinced trains were obsolete.”

Firms across the region are feeling the pinch. Net outflows for Asia hedge funds excluding Japan were about $3.6 billion in the first four months of the year, compared with net inflows of $8.1 billion for all of 2021, according to figures from Eurekahedge.

While not immune to the carnage, Hillhouse has invested in a wider array of countries and industries than […]

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