In Depth: How a Detained Stock Trader Played with Fire
(Beijing) – A fund manager known as China's Carl Icahn for profiting handsomely from the nation's volatile stock exchanges has become the latest target of a government crackdown against illegal trading tied to last summer's market meltdown.
Xu Xiang, the 39-year-old founder and general manager of a Shanghai-based asset management firm called Zexi Investment, has been detained for "illegally obtaining inside information about the stock market and manipulating prices," the official Xinhua News Agency said on November 1, quoting police.
As of September, Zexi said it was serving private clients through seven funds with 20 billion yuan under management. The firm's website shows two of the funds have seen their value increase 30 times from the original investment from 2010 to October. The company does not say what percentage of its assets under management is in the stock market.
The Xu detention plot thickened on November 10 when it was reported that public security officials and the Shanghai Stock Exchange had slapped a two-year trading suspension on shares held by parties related to Xu in four companies.
The asset freeze that began September 9 includes Wenfeng Great World Chain Development Corp., a consumer electronics retailer in which Xu's mother, Zhen Suzhen, holds 14.9 percent of company shares, and Daheng Science and Technology, an optics components manufacturer in which she owns a 29.8 percent equities stake. The other two companies affected are consumer good retailer Ningbo Zhongbai Co. and property developer Deluxe Family.
In another twist to the Xu case, Xinhua said police had detained an unspecified number of Zexi employees. No other details were available.
Xu's detention shocked many investors who had long respected him as a legendary punter with a knack for successfully timing investment moves according to volatile stock market swings. He claims to have started playing the Shanghai stock market in 1993, when he was just 17 years old. He started Zexi in 2009, and according to the firm's website each of its funds had scored annual yields of 160 to 323 percent as of October.
Skeptics have long wondered whether something more than trading skills and good luck had factored into his success. This skepticism sparked frequent rumors that sometimes forced Zexi officials to deny that Xu had broken the law.
A few weeks before Xu's detention, and just after the stock market meltdown prompted a government probe into trading irregularities, a Zexi statement reflected a similar tone. A brief statement on its website declared "neither the company nor company staff members have been investigated."
A native of Zhejiang Province in eastern China, Xu started his investment career while in high school by borrowing 30,000 yuan from his parents, he told Caixin in a 2012 interview. It was a good time to get in the game, as the market's index rose 378 percent between 1992 and 1994.
"I studied the stock market by reading books and attending lectures, and by studying foreign investment techniques," Xu said. His trading style turned more aggressive in the late 1990s. Soon, he was rich
In 2005, Xu moved to Shanghai from his hometown Ningbo. Four years later, he started Zexi as a fund management firm and focused on investing in the secondary market in China.
Xu later shifted some of Zexi's asset management responsibilities to a new branch in Beijing. He also started spending most of his time in the capital.
From 2011 to 2014, one Zexi fund posted a return of 536 percent and another yielded 361 percent, ranking first and second among the nation's 491 private funds, according market analysis website licai.com.
Zexi also did very well during the stock market meltdown, which saw the Shanghai index plunged more than 30 percent from mid-June to August. Licai.com said that in the first nine months of the year, Zexi's investments earned an average 218 percent – far more than the second-most profitable player, Shen Zhou Mu Fund, which reported a 94 percent yield.
Throughout his successful career, though, Xu has protected his privacy. He has largely shunned the public spotlight and apparently avoided investor conferences and similar public events. He granted an interview to the China Securities Journal in 2011 and Caixin in 2012. Otherwise, his name has seldom appeared in the media.
Nevertheless, Xu is well-known among stock investors and fellow fund managers. One securities broker who spoke with Caixin called him "a born trader" with special investment instinct and a keen ability to predict future stock market sentiments.
A former Xu employee named Ye Zhan, who now works as an assistant to the president at Zhongtai Asset Management Co., in the eastern city of Jinan, described Xu as a hard-working market player with no interests outside his job.
Zexi's first successful product was the firm's No. 1 fund launched with 1 billion yuan in March 2010. A source close to the fund said most of the fund's start-up money came from Xu.
At the end of that year, Zexi No. 1 reported a 71.3 percent annual return even though the CSI 300 index, which tracks the share prices of 300 companies listed on the Shanghai and Shenzhen stock exchanges, lost 12.5 percent during the same 10-month period.
The firm soon added more funds. And by the end of 2012, it was managing more than 10 billion yuan, making Zexi the nation's second-largest, exclusively private-client asset manager, after No. 1 Shanghai Chongyang Investment Co. Within five years, Zexi's assets under management had nearly doubled.
Zexi stunned the market by investing in slumping stocks at just the right time. In late 2011, for example, Zexi bought 30 million shares in a beer maker called Chongqing Brewery after its Shanghai stock price plummeted. Investors had dumped the stock after the company's investment in hepatitis B vaccine research project reportedly failed. Zexi's timing was perfect, as the stock rebounded just a month later.
"Any sudden collapse of a stock's price will be followed by a rebound," explained a fund manager who asked not to be named. "Xu figured out the precise law" that governs such rebounds, the person claimed.
Xu and Zexi also found the link between volatility and stock picking. Several Zexi employees who spoke with Caixin said the firm made money by trading highly volatile shares in companies such as Fixedstar Group, FDX Window Film Co. and Shenzhen Laibao Hi-Tech Co.
In the China Securities Journal interview, Xu said Zexi's 30-member investment research department played a crucial role in stock decisions. "They cover many industries," he said. "Our investment decisions rely mainly on their research."
Those decisions were always closely kept secrets, said Ye. And even the researchers didn't know how higher-ups reacted to their recommendations until after they saw personal job performance assessments at the end of each year.
These researchers, according to sources close to the company, include asset managers poached from public fund companies and former financial journalists.
Zexi attracted a lot of attention during the summertime stock market turmoil by reporting sound profits even while most peers were suffering huge losses. Between mid-June when the slump began and mid-August, 70 percent of the nation's privately offered funds reported losing money on stock investments. But all five Zexi reported gains – some as high as 47 percent.
Zexi's standout performance drew both awe and skepticism, prompting the company's statement discounting rumors of an investigation. Xu went a step further in September during an interview to the Xinhua-affiliated Economic Information Daily newspaper, saying he had started selling off stocks after realizing in May that the overall market was in trouble.
Company statements filed with the Shanghai and Shenzhen stock exchanges said Zexi as of June 30 had sold all of its shares in Shanghai Meters Bonwe Fashion & Accessories Co., China Eastern Airlines, financial data provider Eastern Gold Jade, and other companies.
Each of these companies later received a capital injection from the government-backed China Securities Finance Corp. and Central Huijin Investment Ltd. as part of an official effort to prop up the tumbling stock market.
Authorities have yet to release any details about their probe into Xu and other Zexi employees. Xu's offices in Beijing and Shanghai have been sealed. And although Zexi's website was still accessible as of early November, it was unclear whether the firm was still doing business.
Investors with Zexi ties are thus concerned about what comes next. Xu's detention "in theory will not affect Zexi's products," said one private fund manager, "but many clients were attracted by Xu's fame, so they may want their money back."
A source close to the China Securities Regulatory Commission (CSRC), which oversees the stock market and is cooperating with public security officials in the investigation, said companies whose staff members violate stock market rules are usually fined. Investors may take a hit, too, if a firm has trouble paying a fine.
But a source close to the CSRC said the regulator only targets a firm for specific products tied to violations such as insider trading or price manipulation, and then imposes fines based on the profits earned as a result of such violations.
Still, private investors whose fortunes rose alongside Xu and Zexi probably have good reason to be nervous, based on the comments of Zhang Zixue, head of a CSRC committee that imposes punishments. In a recent article published in the Tsinghua Financial Review journal, Zhang said the CSRC's rules lack clear guidelines for fining investors whose asset manager broke the rules.
(Rewritten by Han Wei)
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