New | China’s homegrown hedge funds fret over industry shake-up
Once star performers in China’s summer of stock woes, homegrown hedge funds are poised to undergo an industry-wide shakeup, with small players out and heavyweights left to survive as their key source of revenue was cut off after Beijing’s market rescue measures.
“We thought a bear market would help us stand out, and actually we did, but things were turned upside down by the new regulations on stock index futures trading,” said a Shenzhen-based money manager of a medium-sized hedge fund engaged in algorithmic trading.
Hedge funds typically navigate an equity meltdown better, with greater China hedge funds outperforming the underlying markets over the sustained meltdown this year. According to data from hedge fund tracker Eurekahedge, those hedge funds lost 11.4 per cent, the most on record going to back to 2000, during the three months between June and August. In comparison, the CSI300 Index tracking large caps in Shanghai and Shenzhen plunged 30.2 per cent.
It reminded me of the US dot-com crash back in 1997 to 2001, which led to collapses of many small hedge funds and left the rest stronger and dominant
But several hedge fund industry sources told the South China Morning Post “a sentiment of doom and gloom” had been all the rage across boutique fund houses since September, when Chinese securities regulators imposed a ban that almost shut traders out of the country’s stock index futures market.
“Some small quant hedge funds are in a tight spot now as the cost of high-frequency trading of stock index futures has spiked,” said Guo Tao, a board member of the Hedge Fund Talents Association(HFTA) in China.
More than 1440 hedge funds have been liquidated so far this year, tripling the number recorded in 2014, data released by Shenzhen-based fund tracker Simuwang revealed.
In Beijing’s concerted efforts to stop the market rout, China’s securities regulators pointed a figure at “malicious short-sellers” in the stock index futures market and launched a crackdown on “irregular trading” – essentially algorithmic and high-frequency trading widely practiced by sophisticated institutional investors, particularly hedge funds.
In late August, the China Financial Futures Exchange defined a position of more than 10 contracts on a single index future as “irregular” and lifted the margin requirements for hedging futures to 20 per cent from 10 per cent. In the past, traders were allowed to hold 600 contracts. Hundreds of domestic quant hedge funds, which bet on equities and adopted complex mathematical models to short CSI stock index futures to hedge risks, found it hard to deal with the higher costs of trading and shut down.