Domestic and foreign hedge fund managers are scrambling to secure
legal advice, hire qualified staff and launch new products in a bid
to save their licenses after the regulator threatened last month to
close down around 17,000 "phantom" fund managers as part of a
broader government financial sector crackdown.
The new hedge fund rules aim to shrink a vast industry insiders
describe as a "Wild East" rife with fraud.
But many in the industry say the measures are heavy-handed and
rushed, threatening to suffocate much-needed domestic and foreign
institutional investment as the country faces its slowest rate of
growth in more than two decades.
"It is very difficult for the regulators to police such a vast
landscape so now they're trying to shake this number out," said
Effie Vasilopoulos, a partner at law firm Sidley Austin in Hong
"This is a sensible thing to do, but the risk is that in trying to
recalibrate, the pendulum is swinging too far in the opposite
Hedge funds have attracted increased scrutiny in China amid fears
the country's relaxed registration-based licensing regime has
allowed fraudsters and shadow-lenders to proliferate.
Private fund registrations more than doubled in 2015 to reach more
than 25,000, according to data from the Asset Management Association
of China (AMAC), a self-regulatory body that oversees private funds.
Roughly two-thirds of these are "phantom" fund managers that have
not launched a product, and may be using the registration for
illegal fund-raising or lending, said AMAC.
While many "phantom" funds may have done nothing illegal, the AMAC
license, a requirement for operating a hedge fund, has often been
used as cover for fraudulent peer-to-peer lending platforms,
industry insiders say. Some fraudsters also raise money upfront for
a bogus fund that is never launched.
RAISING THE BAR
Last month on the eve of Chinese New Year, a week-long holiday in
mainland China, AMAC said it was raising the bar with new risk
management and qualification requirements.
There would also be penalties for tardy information disclosures and
an obligation for new fund managers to obtain a legal opinion
endorsing their operations - all with immediate effect.
The association said it would revoke the licenses of fund managers
if they failed to launch products by two separate deadlines in May
and August, sparking a race to save registrations, according to
"The new rules are going in the right direction, but the problem is
that they were published just before Chinese New Year with immediate
effect and short compliance deadlines," said Ying White, a partner
at law firm Clifford Chance's China office.
"So there hasn't been much time to get to grips with them, and there
is still a lot of ambiguity in the rules."
Although the rules spell boom times for lawyers, who can charge up
to 100,000 yuan ($15,000) for a complex legal opinion, market
insiders said they expect as many as 12,000 fund managers to
de-register or be shut down.
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Several managers listed by AMAC as having no products told Reuters
they were working on new products in a bid to save the registration.
"We are aware of the new regulations," said an employee at Shandong
Province-based Ocean Brightstone Industrial Fund Management, who did
not give their name. "We have new private fund products that we are
currently working on."
A new requirement for senior executives to have fund management
qualifications and experience is also proving tricky, because there
is not enough talent to go round, said one Shanghai-based banker who
helps set up hedge funds.
"In the short-term it's really annoying for my clients, but in the
long-term it's a good thing for the industry," she said.
An employee at a small Shanghai hedge fund said the qualification
requirement was causing headaches.
"At the moment we only have one person who has taken the test, but
now one of my colleagues is rushing to take it," she said.
"Thankfully the test is not hard."
AMAC did not respond to requests for comment, but one person
familiar with its thinking said staff felt the association had
approved too many funds and did not have proper oversight of the
This person confirmed AMAC, a state-run body supervised by China's
securities regulator and civil affairs ministry, had slowed
approvals and was considering further restrictions.
Although the rules are aimed at domestic funds, they are also
hitting foreign fund managers that have set-up onshore entities
through special cross-border investment schemes, as well as foreign
firms hoping to partner up with domestic funds.
One executive at a multi-billion dollar overseas hedge fund looking
to set up such an arrangement said his firm had had to delay its
launch plans following the rule changes.
"While attacking illegal entities, the restrictions are also
impacting those funds that want to do real business," said Elva Yu,
a partner at Llinks Law Offices in Shanghai.
(Reporting by Michelle Price in Hong Kong and Engen Tham in
Shanghai; additional reporting by Tris Pan in Hong Kong; Editing by
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