When a new hedge fund opened in Mountainside, New Jersey, a leafy suburb that still holds an annual little-league parade, few would have guessed where much of its funding came from: Chinese billionaire CaiKui.
The credit hedge fund, Westfield Investment, was founded by former Goldman Sachs Group Inc. Managing Director RenyuanGao and managed $139 million as of January. It’s part of a new crop of asset management firms that are expanding China’s reach on Wall Street as money has poured into the U.S. from the world’s second-biggest economy.
China’s marquee names are among those setting up shop in the U.S. Chen Feng, who controls the HNA Group airline and hotel conglomerate, has opened a U.S. money management firm. China Vanke Co., the mainland’s second-largest residential developer, has indirectly taken a major stake in a manager. All told, about 324 firms with financial ties to the mainland and Hong Kong had registered with regulators by last year, more than double the number in 2012, filings show.
They are riding the wave of capital that left China on concerns about bank debt, a real estate bubble and the yuan, which plummeted about 11 percent against the dollar in the last two years. The currency flight was reflected in balance of payments data where capital outflows tripled to $220 billion last year from $70 billion in 2014, according to Derek Scissors, a China economist at the American Enterprise Institute.
“There is so much Chinese money floating around the U.S. now,” Scissors said. “If you’re a Chinese money manager, why wouldn’t you come here?”
The migration comes amid a Chinese shopping spree for an array of U.S. companies, including financial firms like New York’s Cowen Group Inc. and the Chicago Stock Exchange. Chongqing Casin Enterprise Group led the purchase of the exchange, which was founded in 1882. The deal was reviewed by a U.S. panel on national security grounds and eventually cleared in December.
In another deal with political overtones, a subsidiary of Chen’s HNA Group agreed in January to buy a stake in Anthony Scaramucci’sSkyBridge Capital, a New York fund of hedge funds firm. The announcement came after reports that Scaramucci had been tapped for a top job in the White House, stirring speculation that HNA’s motives were partly political.
Scaramucci, whose White House job never materialized, has denied that HNA was seeking influence in the Trump administration.
The registration of the China-linked firms with the SEC hasn’t drawn such scrutiny. The SEC began requiring hedge funds and buyout firms to sign up with the agency in 2012 as a result of the Dodd-Frank Act. About 30 percent of the Chinese firms that registered by 2016 are full-fledged money managers. The rest filed as exempt advisers that operate in the U.S. on a more limited basis.
“It doesn’t require a lot to register in the U.S.,” said Michael McCormack, a financial marketing consultant who specializes in China’s asset management sector. “Especially when you compare it with the months or years it takes to get registered as a money manager in China.”
Several of the firms, such as Vanke, have government ties or connections with state-owned enterprises. Some registered managers plan to invest in China, Hong Kong or Taiwan. Others say they will buy U.S. assets, such as real estate, or venture capital stakes in Silicon Valley startups.
Vanke Holdings USA formed Brightstone Capital Partners with several U.S. real estate experts to acquire commercial property. “We are definitely seeing a lot of opportunities,” said Kai Yan Lee, managing director of Vanke Holdings.
China’s biggest financial firms have their hands in several of the startups. Hong Kong’s ICBC Credit Suisse Asset Management International, which is controlled by a joint venture between Credit Suisse AG and the state-run Industrial and Commercial Bank of China Ltd., registered with the SEC last May. The asset manager, one of the largest in Hong Kong, plans to offer U.S. funds.
Citic Capital Holdings, a money manager for one of China’s largest state investment companies, supplied $45 million to hedge fund CCSZF Management in Norwalk, Connecticut. ICBC provided financing in return for a cut of the profits. The fund makes leveraged bets on Treasuries through a relative value arbitrage strategy. Officials from ICBC Credit Suisse and ICBC didn’t respond to requests for comment.
Some firms manage money primarily for moguls such as Cai, who has invested overseas for years and is worth $2.7 billion, according to the Bloomberg Billionaires Index. He was married to Wu Yajun, who was the richest woman in China until the couple divorced in 2012.
Gao, Cai’s hedge fund manager, generated a 51 percent gain at Westfield in 2016, in part by betting on distressed corporate debt, according to an investor letter viewed by Bloomberg. Gao and a spokeswoman at Cai’s family office, Junson Capital, declined to comment.
Chen, whose conglomerate last year bought a stake in Hilton Worldwide Holdings Inc., has also focused his U.S. firm, HNA Investment Management, partly on tourism. The firm reported assets totaling $78 million at the end of 2016, including a 19 percent stake in Red Lion Hotels Corp., a Spokane, Washington, hospitality and leisure company. HNA Investment officials didn’t return calls seeking comment.
“Everyone is looking for ways of carrying cash across the border,” said Robert McTamaney, who formerly ran Goldman Sachs Asia’s securities division. “To the extent that domestic Chinese investors can invest” abroad, “the single largest consideration is an implicit short on the renminbi,” said McTamaney, who now runs Ripple Capital Management in New York.
Chinese citizens were able to circumvent government limits on overseas investing, including a $50,000 annual cap on foreign currency purchase, until last fall. Officials began to tighten enforcement of the restrictions in response to a decline in foreign reserves that reached $1 trillion by the end of 2016.
That prompted JD Wealth, which is majority owned by e-commerce giant JD.Com Inc., to shelve its plan to start a robo-adviser in the U.S. after registering with the SEC, according to a person familiar with the situation. Beijing-based JD Wealth had planned to allow Chinese citizens to open brokerage accounts with as little as $100 and invest in U.S. stocks through their mobile phones.
Other Chinese firms are raising funds in the U.S. following the government crackdown. XIO Cayman Ltd., an offshore affiliate of XIO Group, a London-based private equity firm controlled by Chinese money manager Athene Li, registered with the SEC in November. XIO Group had earlier raised about $120 million from investors in the U.S. and overseas, according to a notice filed with the SEC on Sept. 6.
The next day, XIO completed its $1.1 billion acquisition of California-based J.D. Power and Associates from S&P Global. Alyssa LaCorte, an XIO spokeswoman, declined to comment.
“The tide has completely turned for almost every Chinese financial firm that is trying to grow an international practice,” said McCormack, the consultant, referring to the stricter enforcement of currency rules. “The clampdown is 99 percent of the reason for raising assets abroad.”
By Courtesy of Bloomberg