Shanghai Bull Asset Management is concerned about the sector’s debt burden and has sold all its CIFI Holdings Group bonds after purchases of those beaten down assets helped spur a 523% increase in its distressed-debt strategy in 2022. Shanghai Silver Leaf Investment, which booked a 136% gain last year using interest-rate swaps, has dumped almost its entire portfolio of homebuilder bonds it scooped up late last year in a high-yield strategy when policy easing boosted prices. 

The prevalence of caution from top-performing fund managers comes despite early signs of stabilisation in property, a key industry that policymakers are trying to support to revive the economy. The liquidity crunch among Chinese developers fueled record defaults last year in an industry that’s been a vital engine of growth. 

“An industry-wide recovery won’t happen any time soon,” said Bull Asset chief investment officer Shi Yafei, who helps oversee more than 1 billion yuan ($146 million). “For the rest of the year, less strong developers will still run into problems, and even some relatively high-quality companies could also face liquidity issues.”

Developer bonds have stabilized after the surge at the end of last year. Meanwhile, a rebound in consumer spending and industrial output in the first quarter of 2023 are adding to optimism a recovery could be sustained, along with rising home sales.

The remainder of 2023 will be a harder environment to generate industry-beating returns as structural distortions in the bond market that fueled a surge in yields last year disappear, according to Zhang Mudong, who helps manage a macro strategy at Silver Leaf. The reopening optimism triggered declines in bond prices and prompted investors in wealth management products and funds to redeem, fueling further drops that drove up yields.

“The market will be tougher this year as there will hardly be such opportunities again,” he said in an interview.  

Marine Capital, which topped multi-strategy funds with a 101% gain last year betting on apple futures, is looking at opportunities to short related commodities like coke and coking coal as demand in the economy wanes later this year. While improving sentiment toward real estate could boost prices for iron ore and glass futures in the first half, external demand may then weaken as the US is likely to join Europe in a recession, adding pressure on some commodities with already-high prices, he said.

‘Not hopeful’ 

With the global economy facing recession risks, “we’re not hopeful that China’s economy can thrive on its own,” said Zhang Yang, a vice president for investor relations at Marine Capital, which manages about 1.5 billion yuan.

Other hedge funds are more bullish on property stocks. Shanghai Banxia Investment Management Centre said that developers which didn’t default are poised to see an expansion in market share and wider margins, which could boost some firms’ stock prices by as much as 10 times from current levels. The optimism was maintained even after the fund lost 2.6% in March as other investors used the recovery in home sales to take profit, causing broad declines in property stocks.

“We’re almost certain that this is a once-in-a-decade opportunity, with the reaction in share prices being just a matter of time,” Banxia said in a recent letter to customers.

Last year’s return at Marine Capital’s Mingrui Dream multi-strategy product, which manages about 150 million yuan, was mainly driven by bets in November that the reopening of the economy would push up apple futures prices. The revival optimism helped drive Silver Leaf’s Derivatives Hedging No 3, which manages about 30 million yuan, book a 136% return, topping rankings for macro funds tracked by Shanghai Suntime Information Technology Co.

Bull Asset’s performance was also driven in part by a return of more than 250% from positions in Tsinghua Unigroup bonds. They were bought near the lows of 2021 and paid off last year when the debts were repaid following a restructuring, Shi said.

There will still be opportunities this year, but it will be a greater test of investors’ ability to evaluate assets and prices, Shi said, adding that Bull Asset bought more Logan Group bonds after they resumed trading last month as the Hong Kong-listed developer’s additional credit enhancements bolstered its repayment prospects.

Homebuilders with large exposure in small cities may still struggle to repay their bonds, and low-quality housing projects like those in regions near Beijing may take “100 years” to sell, he said.