When the Shanghai-traded bonds of conglomerate China Minsheng Investment Group plunged 40 percent over two days in January after news it had missed a repayment, Beijing-based hedge fund manager Jash Zhang smelled blood, Trend reports referring to Reuters.
As the private investors in the bond rushed to sell, Zhang snapped up CMIG’s dumped bonds at about 50 yuan ($7.48) apiece, or half their face value, betting that the 300-billion-yuan company would eventually repay the debt.
The strategy，she said, is simply to pounce when faint-hearted investors are wavering.
“When bad news breaks about an issuer, some funds will scramble to sell the bonds,” said Liu Xiaofang, head of investment research at Shanghai Fengshi Asset Management Ltd, which launched its first vulture fund in September. But the bonds’ underlying problem might be “not that big,” creating opportunities.
Zhang and Liu are among a new flock of vulture investors that have emerged in China’s corporate bond market in the last year, seeking to profit from steep sell-offs.
The risky but potentially lucrative business of trading in bonds on the verge of default is in its infancy in China, almost as new as the phenomenon of corporate defaults in the state-run economy.
A regulatory source said only a handful of other hedge funds have entered the trade, including Lanjing Investment, Colight Asset Management, Jing Tang Investment and Yongle Fund Management. The source declined to be named because of the sensitivity of the matter.
By some estimates, the market in such distressed bonds is worth just 10 billion yuan ($1.5 billion), a tiny fraction of the $472 billion corporate bond market.
But analysts expect it to grow rapidly as the country’s default wave, driven by funding squeezes in the private sector, claims more victims.