Chinese Hedge Funds: Understanding Performance with CAPM and Factor Analysis

Abstract

While American hedge funds have been an institutional phenomenon dating back to the 1950s, the Chinese hedge fund industry is a relatively new space, having only taken off in the 2000s. Since then, Chinese hedge funds have undergone an accelerated process of expansion, standardization and regulation. According to the Chinese Securities Regulatory Commission monthly report, they reached 34,707 registered funds and approximately total asset under management of 338 billion USD by August 2018. As these funds continue to popularize, investors are interested in understanding how to differentiate between funds that generate market-beating returns and those that do not. We do linear regressions against the market premium, following a Capital Asset Pricing Model (Sharpe, 1962), as well as a Principal Component Analysis (Fan & Yao, 2017) to find the most important factors in determining Chinese hedge fund performance over the long run.