10 Hedge Funds In Asia Lose $10B From Evergrande, $158B From CDs

A study conducted by the Deutsche Markt Screening Agentur GmbH (DMSA), an independent data service, has found that 10 large pension and investment funds specializing in Asia will lose $10-billion once the Chinese property giant Evergrande collapses under the weight of its $305-billion debt.

Photo Insert: China Evergrande Centre

In a report dated Nov. 17, 2021, but carried by Deutsche Presse-Agentur (dpa) later, DMSA said the hedge funds have lost $7 billion and another $2 billion would evaporate once insolvency is filed.

Another $158 billion in losses on Evergrande credit default swaps (CDS) by international investors is also expected

“Evergrande and general China exposure have led to losses of up to 21 percent this year in all 10 funds studied… Current Evergrande bond prices are about a quarter per dollar (about 25 percent of 100 nominal) and, based on Fitch redemption rates, will fall to 5 percent per $100 upon insolvency. Therefore, a further correction of 6 percent or $2 billion is expected… If Evergrande goes bankrupt, the above funds would lose $9 billion in total year-to-date. This does not take into account real estate companies that are still well valued and which could also be on the verge of insolvency. The funds' losses then exceed the $10 billion mark," explained DMSA senior analyst Dr. Marco Metzler.

It also shows that with only $1.2 billion of reported official Evergrande bond exposure, the losses are significantly higher than the nominal bond exposure by a factor of 10.

"The difference can only be explained by possible additional investments in other bonds from Chinese real estate developers and CDS," Dr. Metzler argued. According to a research report by investment bank Goldman Sachs, the market's CDS exposure to Evergrande is said to be around $158 billion.

"This shows that extent of the spill-over effects of the Evergrande bankruptcy. In addition to the $23.7 billion in bonds, another $158 billion would then be lost," Dr. Metzler said.

Valued at $55 trillion, the Chinese real estate market is twice the size of that in the US. It generates 29 percent of China's gross domestic product (GDP) compared with 10 to 20 percent in other nations and has been called the most important sector of the global economy.

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