THE last great frontier for international asset managers may prove the toughest yet to conquer.

As China opens its version of the hedge fund industry to overseas firms for the first time, pioneers including Fidelity International and UBS Group AG are wading into a market full of both promise and peril.

While the country is home to one of the world’s biggest pools of household wealth, it also has a cutthroat money-management business where foreign brands and investment styles lack widespread appeal.

China veterans say international managers will struggle to lure inflows unless they establish a local track record of outsize returns — no easy feat given the fickle nature of Chinese markets and the aggressive investment strategies employed by homegrown competitors.

More than 7,700 domestic rivals are already jockeying for clients in the nation’s so-called private securities fund industry, where Fidelity became the first overseas firm to debut a product for institutions and rich individuals in May.

“Investors who are putting in real money will be cautious and need to look at the performance,’’ said Ellen Kuang, a Beijing-based deputy general manager for the high net-worth client unit of Harvest Fund Management Co., which oversees about 950 billion yuan ($142bn) and helps customers allocate money to external managers.

As home to the planet’s biggest population and $23 trillion of household savings, China has an obvious appeal to global money managers in search of ways to offset shrinking fees and investor withdrawals in the developed world. But it could be a long while before the country makes a meaningful contribution to the industry’s bottom line.

“Once they set up onshore, what these firms may find is that they don’t have the same brand recognition as they do overseas,” said Neil Flynn, an analyst at Shanghai-based consulting firm Z-Ben Advisors Ltd. “It takes time.”

While overseas managers have had a presence in China’s mutual fund industry for years, a 49 per cent cap on their ownership stakes in local joint ventures has limited their sway over key decisions and prompted some firms to avoid the country entirely.

When regulators opened the 2.3 trillion yuan private securities fund market to international managers in June 2016, they allowed the firms to be 100pc owned by foreigners. The first entrants have started rolling out their debut offerings over the past three months. (Private securities funds, which can only be sold to domestic institutions and wealthy individuals, invest in everything from stocks to bonds to commodities and derivatives.)

UBS is betting that its cautious approach to risk management will help it stand out in China’s ‘super-competitive’ funds market, Rene Buehlmann, head of Asia Pacific for the firm’s asset-management unit, said in an interview last month.

The Swiss bank, which already operates a securities joint venture and wholly-owned local lender in China, plans to target multinational companies that need help managing their onshore cash, Buehlmann said.

Fidelity International’s first offering, a Chinese bond fund, was “launched ahead of schedule and has fully met all of our expectations,” Mariko Sanchanta, head of corporate communications for Asia, said by email.

She declined to provide details, citing local compliance rules. The fund is currently being managed with seed money from Fidelity and will be marketed to external clients once it establishes a track record, according to people familiar with the matter, who asked not to be named because the information is private.

While funds run by international firms could attract Chinese savers looking for more diverse investment styles, inflows will be limited at the outset, according to Li Chunyu, whose Rongzhi FoF No. 5 fund of funds has posted an annualized return of about 16pc since its inception in February 2015.

That’s partly because of the unique structure of China’s 60 trillion yuan asset-management industry, where investment products tend to fall into one of two broad categories: risky funds that offer a chance at big returns, and lower-yield offerings with explicit or implicit principal guarantees.

The latter grouping is dominated by banks’ wealth-management products, which currently promise annualized yields of around 4.5pc on average.

To lure investors from WMPs, many of China’s private fund managers try to amplify their returns with borrowed money and concentrated bets. It’s a dangerous strategy when markets go the wrong way, but it can produce spectacular gains when things go right.

This year’s top-performing private bond fund is up 39pc, while the No. 1 stock fund has gained 112pc, according to Shenzhen PaiPaiWang Investment & Management Co., a compiler of domestic fund returns. Benchmark indexes for China’s debt and equity markets have gained 3.6pc and 5.5pc, respectively.

Foreign firms tend to have more conservative investment styles, which means they’re unlikely to appear at the top of China’s performance rankings, according to Yan Hong, a Shanghai-based director at the China Hedge Fund Research Center. That will make it difficult to attract local clients, Yan said.

The headwinds in China are strong enough that AXA Investment Managers, a French firm that oversees $880bn worldwide, has decided to take a wait-and-see approach.

With assistance from Judy Chen and Denise Wee

Bloomberg/The Washington Post Service

Published in Dawn, The Business and Finance Weekly, August 14th, 2017