Will Beijing bring a ray of light to the mainland's "sunshine" private trust funds next year?
After a lacklustre performance this year, managers of the mainland's nearly 1,000 such funds - a prototype form of hedge fund - are keeping their fingers crossed in anticipation of a major liberalisation of the sector that could boost the domestic stock market.
The National People's Congress (NPC) is expected to pass an amended law governing securities investment funds early in the new year, giving experienced money managers greater freedom to raise capital from cash-rich investors to play stocks.
According to the draft of the amended law published by the NPC, hedge funds will be for the first time officially acknowledged by China's regulators as fund managers able to directly issue their own products to investors.
Beijing took a step towards liberalising the hedge fund sector in 2004, but the funds could be launched only via trust firms while the regulators were still cautious about the funds.
The pending liberalisation would save the managers fundraising costs since they do not have to pay fees to the trust firms for their services in fundraising.
For Chen Jiwu, president of Shanghai Vstone Capital, the liberalisation will mark a watershed in the country's equity industry.
"Just take a look at the talent pool, the sunshine funds attract the best and most capable managers now," he said. "They can easily eclipse mutual fund managers if the regulator gives them free rein."
Mainland officials have long been cautious on hedge funds, believing they were the cause of boom-to-bust cycles on global stock markets.
Consequently securities officials, were uncomfortable with the term "hedge fund", preferring to use "sunshine" fund instead.
China's mutual funds managed by 69 asset management firms now play the dominant role in the securities fund sector, whose total assets exceed 2.2 trillion yuan (HK$2.7 trillion).
The sunshine private trust funds which must register with the regulator manage about 150 billion yuan of capital, accounting for less than 7 per cent of the mutual funds' asset value.
In the first 11 months of this year, sunshine funds posted an average loss of 5.21 per cent against an 8.8 per cent drop in the key stock market indicator.
They barely beat stock-focused mutual funds which lost 5.28 per cent in the same period, according to Guotai Junan Securities.
Last year, sunshine funds reported an average loss of 15.45 per cent, compared to a loss of 23 per cent by stock-focused mutual funds.
"Overall, sunshine funds had a better track record than mutual funds and it is reasonable for China to support their growth," said Howhow Zhang, chief researcher with fund consultancy Z-Ben Advisors. "Despite the poor performances over the past two years, the sunshine funds have reasons to cheer next year as the regulator is now taking a positive attitude towards the sector."
Since Guo Shuqing, chairman of the China Securities Regulatory Commission, took office late last year he has been adamant in bolstering the growth of hedge funds, part of efforts to encourage institutional buying in the volatile market.
Guo's intention to develop the hedge fund sector has prompted lower-level officials to map out detailed policies.
In August, the Shanghai Stock Exchange told a group of fund managers in a seminar that the bourse would allow sunshine funds to list, a move to help their fundraising.
The exchange did not say when the policy would be implemented, but Chen said it was a clear sign that the regulator aimed to direct a flight of capital from the mutual funds which raise money from public offerings to the hedge funds - offered privately to wealthy investors.
He predicted that the move could easily help sunshine funds raise an additional 100 billion yuan in capital.
In the past five years, dozens of star fund managers have jumped ship from the mutual fund houses to the sunshine fund operators due to the attractive pay perks they offered.
More importantly, the managers were given a bigger say in stock picks and investment decisions.
At present, a stock-focused mutual fund must invest a minimum 60 per cent of its assets into stocks. The managers of sunshine funds are not subject to the requirement.
"It is good time to develop hedge funds because the funds are nimble and flexible and can bring investors good returns," said Yang Ling, the chief strategist at StarRock Investment Management, one of the mainland's largest managers of sunshine funds.
"Since the sector has gathered a team of professional managers and taken shape, it will be great if the government can give it bigger room for growth."
Unlike mutual funds that charge investors a flat management fee - normally 1.5 per cent based on the total assets under management - sunshine funds, aside from the management fee, take an extra 20 per cent commission from the profits made from equity trading.
"Because of the extra income from the 20 per cent profits, hedge funds are inarguably pressured to be a success, chasing maximum returns for the investors," said Yang. "A capable investment team and proper investment strategy are the keys to hedge funds' success."