By Samuel Shen and Selena Li
China’s $715 billion hedge fund industry is facing renewed pressure from stringent regulations coming into effect next month, forcing some investment firms to seek fresh capital from white knights or even shut shop.
New guidelines for the fragmented industry from Aug. 1 will impose higher asset thresholds for funds to operate, and also stricter norms for their investments and marketing.
These rules would come after China’s regulators cracked down on computer-driven ‘quant funds’ this year as part of Beijing’s tighter supervision of the financial industry.
Zhang Kaihua, founder of Nanjing-based HuYang Private Fund Co, is selling up to 6.3 percent of his company to boost capital.
“Higher compliance rules are making operations more and more costly,” said Zhang, who is luring new partners to keep the business afloat. “We’re struggling as a small asset manager.”
The new rules require a fund to have a minimum 10 million yuan ($1.38 million) to be set up, and assets of at least 5 million yuan to operate, posing a challenge to many managers of tailor-made, single-account products. Pitches to prospective investors via live-streaming and other public platforms are also being disallowed.
Hedge funds in China refer to loosely regulated private funds that raise money from institutions or wealthy individuals.
Nearly 300 such funds out of the more than 8,000 in China have already terminated business so far this year, data from industry body Asset Management Association of China (AMAC) showed, as a flagging stock market, sluggish economy and weak consumer sentiment take their toll.
The upcoming rules were the final straw for some.
Chun Xu, fund manager at JSVest Shanghai Ltd, shut his fund house earlier this year, believing he does not stand a chance in an environment where helping the rich get wealthier is frowned upon. Xu is contemplating moving into the coffee and tea retailing business.
Tighter rules are “sapping market liquidity being provided by hedge funds,” Xu said. “Regulators are prioritizing political correctness over market efficiency.”
AMAC, which is supervised by the China Securities Regulatory Commission (CSRC), said the new rules are aimed at promoting the healthy development of a crowded industry where some players are too small and loosely managed.
Some funds “naturally shut down due to their lack of investment capabilities, low level of compliance and risk control, which is a normal reflection of survival of the fittest,” AMAC said in a statement to Reuters, vowing continued support to the broad private fund sector.
“The industry is experiencing its darkest hour,” said Hu Bo, head of investment at Shanghai-based hedge fund manager Professional Fund. “From investment to fundraising and marketing, rules are being tightened.”
The new guidelines also cap a fund’s exposure to a single asset at 25 percent, potentially upending many funds’ business models of making outsized bets on certain stocks, fund managers say.
