Hedge funds and China’s stock market: a study on factors influencing investment decisions by fund managers

Hedge funds and China’s stock market: a study on factors influencing investment decisions by fund managers The research was conducted using a web-based questionnaire sent to all Asia-related hedge funds, worldwide. Analysis of the collected data revealed that the factors influencing the portfolio investments made in China by fund managers differed from the factors which influence investment in global and emerging markets. While market conditions, market timing and changes in earning estimates are the top three influencing factors on investment decisions on global stock exchanges, fund managers are more influenced by global trend, potential growth and company size when dealing with China’s stock market. Research results also support the hypotheses that there are relationships between size of fund, trading style and personal expertise of managers and the factors influencing investment decisions. The international hedge fund industry and China’s stock market are two fast-growing entities of global capital markets. Stronger interaction between these two institutions in the future would create important implications for the financial world. The objective of this research is to identify factors that influence investment decisions by hedge fund managers in relation to China’s stock market. The following implications can be extracted from this research: (1) If China’s stock market is classified within the Emerging Markets Index, adjustments are necessary and provision should be made reflecting investor criteria for China. (2) Global trends and the potential growth of China were the two most attractive factors influencing investment decisions, suggesting a ‘herding’ tendency and ‘attention-grabbing’ bias of hedge fund managers. (3) Company evaluation remains important to hedge fund managers, suggesting that Chinese government regulators should implement reforms to improve quality of listed firms. (4) Gaps in the research on China’s stock market as well as the outcomes of this research indicate that further studies on the international hedge fund industry and China’s stock market could reveal new perspectives and enhancements to the current body of knowledge on these subjects. This thesis consists of six chapters. Chapter 1 provides an overview of the research context and research justification. The research problem and questions are identified, and the theoretical framework and hypotheses are constructed. Chapter 2 presents an overview of the hedge fund industry and China’s stock market. Chapter 3 examines the literature: factors that influence investment decisions in global, emerging markets and in particular, China’s stock market. A framework of an 8-step decision-making process was developed. Chapter 4 researches alternative methodologies and presents a justification for the selection of the research methodology. Chapter 5 summarises the results of the data analysis and interpretation. Chapter 6 discusses the conclusions, implications, contributions and limitations of the research. Recommendations for further research are also included. The outcomes of this research are expected to benefit all participants of the global financial industry, including institutional and individual investors; executives in banking, insurance and securities businesses; financiers of listed firms and multinational corporations; government regulators and independent research analysts. Other beneficiaries will be academics and the media