While “hedge funds” have operated in China for some time, they have run under the official radar without licenses or regulatory approval, but on Monday the nation’s first hedge fund to gain the blessing of its securities regulators debuted. Guotai Junan Securities Co. is preparing to launch a 297 million yuan ($45 million) fund that will pursue a market-neutral strategy.
According to a Reuters report, regulators have been wary of approving hedge funds in China, concerned with the funds’ negative reputation during the financial crisis. They have also been tightening up on the real estate market in an attempt to prevent a bubble. In such a wary atmosphere, particularly when Beijing seeks to slow growth through tightening monetary policy, Zhang Biao, president of Guotai Junan, said in a report, “There's huge demand for hedge funds in China, with the market awash with cash seeking modest, but stable returns.”
The fund, which will target an annual return of 10-15%, will use index futures to mitigate systematic market risks. Index futures were launched in China just last year, when the country also allowed short selling for the first time. That created a window of opportunity for the entrance of official hedge funds and derivatives to ward off risk, and also allowed investors to be able to profit from the fall of stock prices.
Aimed at wealthy investors and carrying a subscription threshold of 2 million yuan ($302,962), the new fund is a precursor for additional, identical funds to raise up to 5 billion yuan, according to Zhang, who wants to emulate the position of James Simons of Renaissance Technologies.
Zhang dismissed concerns that hedge funds could destabilize China’s stock market, saying, “The door is just open. Hedge funds in China are rabbits and sheep now, not wolves and tigers.”
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