China's Hedge Fund Industry Braces for Regulatory Storm

China's $715 billion hedge fund industry is experiencing intensified pressure due to new regulations taking effect next month. These rules impose higher asset thresholds and stricter norms for their operations and marketing. The tightening regulations aim to foster a leaner financial industry but have led to several fund closures and market challenges.

China's $715 billion hedge fund industry is facing significant challenges as a wave of stringent regulations is set to take effect next month, compelling some firms to seek additional capital or cease operations entirely.

Starting August 1, the new guidelines will impose higher asset thresholds for fund operation and stricter norms for investments and marketing. This follows a crackdown on quant funds earlier this year, part of China's broader financial supervision strategy.

Zhang Kaihua, founder of HuYang Private Fund Co, is selling up to 6.3% of his Nanjing-based company to boost capital. "Higher compliance rules are making operations more and more costly," Zhang said, highlighting the struggles faced by smaller asset managers.

Under the new rules, a fund must have at least 10 million yuan ($1.38 million) to be established and maintain assets of 5 million yuan to operate, challenging many managers of customized products. Public pitches via live-streaming or similar platforms are being prohibited.

Nearly 300 funds out of over 8,000 in China have shut down this year, according to data from the Asset Management Association of China (AMAC), amid a weak stock market, sluggish economy, and low consumer sentiment.

Chun Xu, a fund manager with JSVest Shanghai Ltd, closed his fund house earlier this year, citing the difficulty of competing in an environment that's adverse to helping wealthy clients get richer. Xu is now considering a career shift to coffee and tea retailing.

"Tighter rules are sapping market liquidity provided by hedge funds," Xu commented. AMAC noted that the new guidelines are intended to promote a healthy industry by weeding out underperforming and non-compliant funds.

The regulatory tightening of China's hedge fund sector is aligned with President Xi Jinping's goals of fostering a more efficient financial industry to support strategic initiatives like tech supremacy and common prosperity.

"The industry is experiencing its darkest hour," said Hu Bo, head of investment at Professional Fund in Shanghai. The new guidelines also limit a fund's exposure to a single asset at 25%, disrupting business models reliant on large bets on specific stocks.

The possibility of further curbs on hedge fund sales through banks poses additional risks. The banking regulator launched a consultation in June to gauge whether such a distribution channel should remain open.

The majority of hedge fund companies in China manage less than 500 million yuan, making them vulnerable to the new restrictions. However, global players like Bridgewater and Man Group, thanks to their substantial resources, are likely to remain unaffected.

Some larger fund managers believe the tighter rules could ultimately benefit the industry. "If you have a fund that cannot maintain 5 million yuan in size, I don't think the business will survive," said Liam Zhou, founder of Minority Asset Management Co. ($1 = 7.2702 Chinese yuan renminbi)

(With inputs from agencies.)