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China's "E*trade Babies" Wiped Out In Market Crash

Tyler Durden's picture




 

What do you get when a bursting equity bubble meets 5X leverage, structured finance, semi-literate banana vendors, and fund "managers" with less than one year of experience?

Harrowing margin calls, panic selling, and, in the end, massive losses. 

As WSJ reports, the relentless, limit-down trading in Chinese stocks that unfolded last week and continued into Monday (despite the PBoC's best efforts to arrest the slide with an emergency rate cut) has wreaked havoc on China's rookie money managers and their unsuspecting clients with losses amounting to as much as 80% in some structured funds.

In China’s market bust, rookie fund managers and their investors are among the biggest losers.

 

The 10 worst-performing funds the past month are so-called structured funds, which are essentially leverage plays tracking some indexes, according to Howbuy.com, a Chinese fund tracker. The three worst performers fell by an average of 77% during the period.

 

Those funds were all led by professionals with less than a year of fund-management experience, according to details on Howbuy.com. 

 

China’s mutual-fund industry was booming until recently. Structured funds were a star performer during a yearlong bull market. But they also have done poorly during the current market decline, which began over two weeks ago. The Shanghai Composite Index closed up 5.5% Tuesday, paring recent losses, but is still down 17% from a high in June. 

 

Similar to leveraged exchange-traded funds in the U.S., structured funds can give investors two or three times the performance of an index. When markets are falling, though, these funds rapidly lose value, and can accelerate a selloff... 

 

During the run-up, Chinese fund-management companies rushed to issue structured funds... 

 

The problem has been finding mutual-fund managers to head these new funds. In recent years, many experienced mutual-fund managers have left their jobs to start their own private-equity firms, which are more profitable. “A lot of junior people were promoted to become fund managers,” said Haibin Zhu, chief economist for China at J.P. Morgan Chase & Co.

Here is a visual summary of the above:

As discussed in "The Biggest Threat To Chinese Stocks: Shadow Lending Crackdown," the structured vehicles that have played a role in allowing retail investors to skirt margin restrictions were partly (or even largely) responsible for the outsized losses posted by China's greenhorns. Here's WSJ again:

Retail investors and even some institutions like structured funds because they have earned outsize returns and it is an easy way to leverage their investments without having to borrow from securities firms or banks.

 

The funds are usually divided into two or more tranches. 

 

With structured funds, the B-tranche is typically forced to sell stocks and lower leverage in a falling market, to protect the interest of the A-tranche fund investors. This has accelerated stock declines and exacerbated B-tranche losses.

 

The May 27 launch of the 246-million-yuan ($39.6-million) Peng Hua High Speed Railway Fund, the third-worst performer the past month among China’s 2,879 mutual funds, according to Howbuy.com, is especially ill-timed. High-speed rail was a hot investment theme, but many of those stocks are now down 60% from their recent peaks.

 

The Peng Hua High Speed Railway Fund is managed by Jiao Wenlong. Mr. Jiao... He became a fund manager on May 5, the prospectus said.

Because we couldn't possibly come up with a better way to encapsulate the fantasy being sold to China's millions of newly-minted day traders by the country's newly-minted fund managers who apparently have just as little experience managing money as the people whose money they are managing have trading stocks, we'll leave you with the following from the aforementioned Jiao Wenlong: 

“Invest in the fund to leverage your dream.”

 

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Tue, 06/30/2015 - 15:29 | 6255239 aVileRat
aVileRat's picture

Wonder how "Belgium" is going to cope with this. China really cant cut much more to goose the market, and a market route was what nearly blew up the Asian Tigers the last time this happened.

 

Tue, 06/30/2015 - 15:32 | 6255248 DeadFred
DeadFred's picture

The Chinese aren't trying to stop this crash. It's been timed to coincide with the Greeks to maximaize the impact on the West. The Chinese .GOV doesn't give a rat's ass about their investors any more than the fates of the soldiers they used to send out in wave attacks with little chance of survival. Their goal is the top dog position and if a few peasants lose their nest eggs so what? They're still alive so they should be thankful.

Tue, 06/30/2015 - 15:51 | 6255311 Ginsengbull
Ginsengbull's picture

They will never be top dog...

 

as long as they are bottom bitch.

Tue, 06/30/2015 - 16:21 | 6255434 7.62x54r
7.62x54r's picture

This is what happens once the shoeshine boys start spewing investment advice.

Tue, 06/30/2015 - 16:51 | 6255554 Bumpo
Bumpo's picture

Or babies start trading

Tue, 06/30/2015 - 16:59 | 6255580 J Jason Djfmam
J Jason Djfmam's picture

As Stymie once said "Them's ain't babies, they's fidgets."

Wed, 07/01/2015 - 14:21 | 6259013 Max Steel
Max Steel's picture

.............says an exceptional insecure stupid muritard bullshit .

Tue, 06/30/2015 - 19:16 | 6256078 Laowei Gweilo
Laowei Gweilo's picture

interesting theory +1

Tue, 06/30/2015 - 15:38 | 6255270 Ludwig Von
Ludwig Von's picture

We gonna sell more US paper ! (we have a box plenty of it)... . 

Tue, 06/30/2015 - 15:54 | 6255321 Bull Bear Nice Pair
Bull Bear Nice Pair's picture

What do you mean "China cannot cut more"? China's one-year benchmark rate is 4.85%, that is a lot to be cut.

Tue, 06/30/2015 - 19:20 | 6256094 Laowei Gweilo
Laowei Gweilo's picture

uhhhh in what world can't they cut more?

 

they haven't even remotely begun to try twist yields or cut rates

 

at the US Fed pace, they could stimulate JUST yields and rates for at least 2-3 years

 

and based on their foreign currency reserves and relative low debt (compared to crazy high debt of local gov't) could probably easily make 3-4 more major TARP sized or 2008-2012 construction sized stimulus projects

 

that doesn't mean they WILL and it is a rather good time to try embrace a soft landing (rather than stimulus now and get a hard landing later)

 

but if they won't they have a LOT of tools left by any conservative western measure

Tue, 06/30/2015 - 15:14 | 6255194 GMacTrader
GMacTrader's picture

That video still never gets old lol! I remember the first $100M I lost when I was 4yrs old. My parents were pissed!

Tue, 06/30/2015 - 15:14 | 6255195 Conax
Conax's picture

I wonder if they'll turn to gold and silver...

Bullish.

Tue, 06/30/2015 - 15:25 | 6255223 disabledvet
disabledvet's picture

Certainly you won't hear me say "don't buy gold and silver in dollar terms" right now.

TALK ABOUT A DISCOUNT!

HOWEVER...

re-reading my history of the Asian Debt Debacle of 1997 one thing that we have in common this go around is the extraordinary MISMATCH between the value of all dollar denominated assets (SUPER EXPENSIVE!) and everything else (well nigh worthless.)

"Intuitively" one would think "everything priced in dollars will reset and the value of the dollar must fall"...but in the IMMEDIATE term "simply put there are no dollars to be had as they are simply to dear."

So now not only are entire MARKETS resetting (China, Europe) but folks are calling into question the value of the "underlying asset" namely THE CURRENCY ITSELF. (Think Ruble, Lira, Brazilian Real, etc)

How long this State of Affairs can last (another week? A month? A year?) is anyone's guess...but TALK ABOUT ARBITRAGE!

YOURE TALKING ABOUT ARBING ENTIRE NATION STATES!

"The Soup Nazi is in charge of your pension now"!!!

Tue, 06/30/2015 - 15:17 | 6255205 i_call_you_my_base
i_call_you_my_base's picture

That's a typo, it's "Invest in the fund to leverage your ream."

Tue, 06/30/2015 - 15:17 | 6255206 davidalan1
davidalan1's picture

Linsanity

Tue, 06/30/2015 - 15:37 | 6255264 Bilderberg Member
Bilderberg Member's picture

LETS LIGHT THIS CANDLE!

Tue, 06/30/2015 - 15:20 | 6255212 Yen Cross
Yen Cross's picture

  I predict more ghost cities.

Tue, 06/30/2015 - 15:22 | 6255218 NoDebt
NoDebt's picture

My level of sympathy for these day-trading mama-sans can not be detected using existing technology.

Tue, 06/30/2015 - 15:28 | 6255221 Yen Cross
Yen Cross's picture

  I predict a huge spike in "free range", dog & cat woking.

Tue, 06/30/2015 - 15:30 | 6255235 Eyeroller
Eyeroller's picture

... in 'Murca.

Tue, 06/30/2015 - 15:27 | 6255228 Dr. Engali
Dr. Engali's picture

I don't always buy the fucking dip, but when I do I mortgage the house, max out the credit cards, and buy triple levered etfs on margin. Stay thirsty my friends. 

Tue, 06/30/2015 - 15:30 | 6255243 disabledvet
disabledvet's picture

"It was never my house to begin with..

Tue, 06/30/2015 - 15:51 | 6255315 Sages wife
Sages wife's picture

Wow, that Dr. Engali is an interesting guy. If he says "It's not you, it's me.", he's lying.

Tue, 06/30/2015 - 17:01 | 6255597 J Jason Djfmam
J Jason Djfmam's picture

Says the most interestingly overleveraged man in the world.

Tue, 06/30/2015 - 15:27 | 6255231 Bill of Rights
Bill of Rights's picture

Barack Obama: Brazil and America Have Similar Histories

https://www.youtube.com/watch?v=45fOkAJNbAg

 

 

Tue, 06/30/2015 - 15:28 | 6255238 Archetype
Archetype's picture

Learning is fun!

Tue, 06/30/2015 - 15:38 | 6255269 Downtoolong
Downtoolong's picture

Too bad the Central Banks can't print more greater fools.

Actually, that's probably a good thing.

Tue, 06/30/2015 - 15:38 | 6255272 Nue
Nue's picture

It's not that big of a deal they can easily cover the losses by selling off their U.S Bonds and cutting back on buying new bonds for a few years.... Oh wow thats interesting after I finished that thought that the four horsemen of the Apocalypse came galloping down the street outside my office.

Tue, 06/30/2015 - 15:57 | 6255338 Bull Bear Nice Pair
Bull Bear Nice Pair's picture

The Chinese has $21 trillion deposits as well as $4 trillion Forex reserve. The recent down trend in stock is no biggie.

Tue, 06/30/2015 - 16:58 | 6255578 Stormtrooper
Stormtrooper's picture

How much is $21 trillion in fiat toilet paper intrinsically worth?  How many BTUs in that $21 trillion.  Can I heat my house for a whole winter with those $21 trillion.  At least I can melt and cast my gold/silver into bullets so they have some intrinsic value.

Tue, 06/30/2015 - 17:30 | 6255701 Handful of Dust
Handful of Dust's picture

Bang Di Ho and Long Er Wong will just pull more of their fat savings out and buy two more houses in California instead of Chineee stock market.

Tue, 06/30/2015 - 17:44 | 6255739 J Jason Djfmam
J Jason Djfmam's picture

Well... at least the end is near.

Tue, 06/30/2015 - 15:43 | 6255292 csmith
csmith's picture

leverage your dream...anagram for "revalue orgy reamed".

Tue, 06/30/2015 - 15:59 | 6255342 juicy_bananas
juicy_bananas's picture

Go long on Chinese mobile execution vans.

Tue, 06/30/2015 - 18:02 | 6255798 TheReplacement
TheReplacement's picture

Chinese style is mass starvation, not mass execution.

Tue, 06/30/2015 - 16:30 | 6255471 cougar_w
cougar_w's picture

what we learn

Tue, 06/30/2015 - 17:02 | 6255584 Smiddywesson
Smiddywesson's picture

"With structured funds, the B-tranche is typically forced to sell stocks and lower leverage in a falling market, to protect the interest of the A-tranche fund investors. "

 

Ah, the shame, me no read the fine print. 

 

Too funny, you can't make this stuff up.

Tue, 06/30/2015 - 17:02 | 6255601 Keyboard Kommando
Keyboard Kommando's picture

Jump, you bastalds!

Tue, 06/30/2015 - 17:21 | 6255664 q99x2
q99x2's picture

The printing presses are at war with each other. BTFD

Tue, 06/30/2015 - 17:46 | 6255745 J Jason Djfmam
J Jason Djfmam's picture

Aren't they more like wishing machines?

Don't they just wish more money into existence?

Tue, 06/30/2015 - 19:11 | 6256052 22winmag
22winmag's picture

You know what this means?

 

Maybe a few less rich asian kids and Red Commie spies at your local American university!

Tue, 06/30/2015 - 19:26 | 6256118 Ginsengbull
Ginsengbull's picture

Maybe they can start teaching in ENGLISH again.

Wed, 07/01/2015 - 01:35 | 6257096 Free_Spirit
Free_Spirit's picture

Should aalso take the heat off the funny money pouring into London and other major world cities boosting house pries out of reach of the normal people

Tue, 06/30/2015 - 20:28 | 6256367 honestann
honestann's picture

Kudos to whoever made that video.

Priceless!

Wed, 07/01/2015 - 01:26 | 6257085 Free_Spirit
Free_Spirit's picture

i just see this as a good correction

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