China’s $715bn hedge fund industry is facing significant upheaval as new stringent regulations come into effect next month, which are pushing some investment firms to seek fresh capital or even shutter their operations, according to a report by Reuters.
Effective 1 August, the new guidelines will impose higher asset thresholds for funds to operate, alongside stricter norms for investments and marketing practices. These changes follow this year’s crackdown on computer-driven quant funds as part of Beijing’s broader efforts to tighten supervision of the investment industry.
The new rules mandate a minimum of RMB10m ($1.86m) to establish a fund, and assets of at least RMB5m to operate. Posing significant challenges to managers of tailor-made, single-account products. Additionally, pitches to prospective investors via live-streaming and other public platforms will be prohibited.
Hedge funds in China are typically loosely regulated private funds that raise money from institutions or wealthy individuals. This year alone, nearly 300 of the more than 8,000 such funds in China have terminated operations, according to data from the Asset Management Association of China.
AMAC, which is supervised by the China Securities Regulatory Commission, says that the new rules are aimed at promoting the healthy development of a crowded industry where some players are too small and loosely managed. According to AMAC, the closure of some funds is a normal reflection of the “survival of the fittest,” as those lacking investment capabilities, compliance, and risk control naturally shut down.
The new guidelines also cap a fund’s exposure to a single asset at 25%, potentially disrupting many funds’ business models of making outsized bets on certain stocks. Further complications could arise if curbs are imposed on sales of hedge funds via banks, a key distribution channel for some asset managers. China’s banking regulator launched a consultation in early June, seeking feedback on whether this channel should remain open for hedge funds, according to one Reuters source.
More than 80% of hedge fund companies in China manage less than RMB500m, with only 91 companies managing more than RMB10bn, according to AMAC data. Global players including Bridgewater, Winton, Man Group and Two Sigma are also active in the country, but are unlikely too be impacted by the new rules, given their size.
