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."

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