The latest year-to-date performance numbers from hedge funds that invest in China's red-hot market appear impressive. But stumbles by some funds in November raise questions about whether they are worth the heavy fees.

The average China-focused hedge fund is reporting a double-digit percentage gain for the 11 months ended in November, with a few up more than 100%.

788 China Fund, managed by Heritage Fund Management of Switzerland, was up 104%. Golden China Fund, managed by China-based Greenwoods Asset Management, was up 100%, while several other funds were up 30% or more, according to performance data reviewed by Dow Jones Newswires.

Anyone Could Have Scored?

But the numbers belie a worrisome performance picture for some funds. Chinese stocks have been a guaranteed moneymaker this year, so investors could have made impressive returns without paying hedge-fund fees. The Shanghai Composite Index returned 82% during the same time period, while the Hang Seng returned 44% — better than returns at some hedge funds.

A number of hedge funds took hits last month when Chinese stocks tumbled, raising questions about their ability to weather volatility. The Golden China Fund, for example, lost 9.3% in November, while the more recently launched Golden China Plus Fund, which focuses on high-growth companies and private equity, dropped 13%, bringing its year-to-date return to 30% at the end of November, according to performance data reviewed by Dow Jones Newswires.

Officials from Greenwoods Asset Management didn't return a request for comment.

A China-focused hedge fund run by Ginger Capital Management in Hong Kong, meanwhile, lost 17% last month, bringing its annual return to 40%. Officials from Ginger Capital Management didn't return a request for comment.

"What investors want to be looking for is risk-adjusted returns," said Christopher M. Schelling, director of strategic research with Thomson Corp. "I wouldn't be surprised if these Shanghai indexes give back a big portion" of their recent gains in coming months, he added.

One Winning Fund

One fund that seems to have weathered the November storm is 788 China Fund, which was up 2.4% last month despite a drop of 9% in the Shanghai Composite Index. Karim Daou, deputy manager of Heritage Fund Management, said the fund invests based on a macro strategy, moving in and out of sectors depending on their broader performance outlook.

"One of the main objectives is to protect the assets, then to beat inflation and interest rates, then to make performance," Mr. Daou said. "We're not benchmarked [to an index], so we have the flexibility needed to protect the portfolio."

While it isn't clear what exactly was behind losses in some funds, Veryan Allen, who advises institutional investors in Japan on investments including hedge funds, said the drops are a "red flag," suggesting the managers are "very long" and not managing risks well enough.

"One of the myths about China is that you can't go short," said Mr. Allen, adding that there are lots of ways to hedge, including shorting U.S.-listed American depositary receipts.

Investors who want only long exposure to China's growth can just as easily skip the hedge funds and their heavy costs, Mr. Allen said. He recommends investors take a look at China exchange-traded funds, which invest in baskets of stocks like mutual funds but trade on an exchange like stocks.

An investment in the iShares FTSE/Xinhua China 25 Index Fund ETF, for example, would have returned 72% through the end of November.

"We can all make money when the sun is shining," Mr. Allen said. "If for whatever reason you think China's going up, you might as well go with the simplest and cheapest and most direct product."

—
**************************************
Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454
www.pauldeng.com

BEIJING — Morgan Stanley's landmark deal to sell a $5 billion stake in itself to China marks a bold move by Chief Executive John Mack. If it pans out, it also will owe some of its success to the long experience and local ties of Wei Sun Christianson, Mr. Mack's steadfast lieutenant and point woman in China.

The surprise deal, announced Wednesday, gives the state-owned China Investment Corp., or CIC, a stake of as much as 9.9% in Morgan Stanley at a time when the U.S. investment bank is staggering under a multibillion-dollar write-down. While initiated by Mr. Mack, the agreement also helps solidify Ms. Christianson's status as one of China's premier deal makers, and perhaps the country's most prominent female investment banker.

The 51-year-old Ms. Christianson, born in Beijing, hails from a pioneering generation of Chinese who went abroad to study in the early years of China's economic overhauls and later returned to help reshape the country's financial system. Among the fellow Chinese she met in New York while studying at Columbia University School of Law in the late 1980s was Gao Xiqing, a Duke University-trained lawyer who later helped found China's stock markets. Mr. Gao today is president and chief investment officer of CIC, which was founded in September to manage $200 billion of China's $1.4 trillion in foreign-exchange reserves.

It isn't clear precisely what role Ms. Christianson and Mr. Gao, both of whom were in New York for Wednesday's announcement, played in the deal. Ms. Christianson declined to comment, and Mr. Gao couldn't be reached. But their involvement in the tie-up reflects the rising profile of their generation of Chinese in global finance, as China becomes an important force in world markets.

The CIC investment could prove a boon to both CIC and Morgan Stanley, although it also risks feeding suspicions among some U.S. politicians that the Chinese fund is seeking to obtain control of strategic assets — something CIC officials have long denied. For Morgan Stanley, it provides an infusion of capital, while for CIC the bet could prove lucrative if the U.S. investment bank is able to successfully emerge from its current woes.

CIC's strategy under Mr. Gao and his boss, Lou Jiwei, a former Chinese vice minister of finance, appears to be a mix of opportunistic big bets and more restrained portfolio investment. Mr. Gao and his colleagues have shown an appetite for prominent deals with the Morgan Stanley stake and a $3 billion stake in Blackstone Group LP earlier this year.

Ms. Christianson has spent much of her career working with Mr. Mack, following him when he left Morgan Stanley in 2002 to join Credit Suisse Group, departing from Credit Suisse when he was ousted in 2004, then rejoining Morgan Stanley in early 2006 after Mr. Mack's return there. In between, she spent 14 months as Citigroup Inc.'s lead investment banker in China.

Ms. Christianson didn't set out to be a banker. Growing up during the Cultural Revolution, a period of chaos from 1966 to 1976 when much of China ceased to function, she was unable to go to college until the late 1970s. When she could, she enrolled at a language institute in Beijing to study English and was on track to become a translator at the foreign ministry.

Eager to attend graduate school, she jumped at a chance to go to the U.S. in the 1980s. She graduated with honors in 1985 from Amherst College in Massachusetts, becoming the school's first China-born graduate, before attending Columbia's law school on a scholarship. It was at Columbia that she met her husband.

New York at the time was home to a small and tight-knit group of Chinese students studying law and finance — subjects almost completely alien to a generation that had grown up with Maoism. Mr. Gao, who had graduated from Duke in 1986, was working at the now-defunct law firm Mudge Rose Guthrie Alexander & Ferdon.

"At the time, most Chinese going overseas were aiming to study science," said Li Xiaoming, a friend of Mr. Gao's who graduated from Duke's law school in 1990 and is now managing partner of White & Case's Beijing office. "There were probably about ten Chinese lawyers then at Wall Street firms, making it a close group." Ms. Christianson and Mr. Gao remained friends as she climbed the investment-banking ladder and he rose through the ranks of China's bureaucracy.

After helping found the stock markets, Mr. Gao became vice chairman and chief executive officer of Bank of China's investment-banking arm and later served as vice chairman of the country's securities regulator and its national social-security fund.

Ms. Christianson briefly served as a regulator at the Hong Kong Securities and Futures Commission. After her third child was born, she decided she wanted a career switch and jumped into finance. Morgan Stanley gave Ms. Christianson her first break in 1998. "I was willing to try and ready to fail," she said in an earlier interview.

Today, Ms. Christianson, Mr. Gao and others of their generation are perpetuating the tradition they helped establish, by recruiting Chinese talent from overseas. CIC, for example, recently hired Li Yingru, a young Chinese who studied in the U.S. and had spent about a year and a half working at the California Public Employees' Retirement System.