|
 Interviews with more than a dozen foreign hedge funds, proprietary
traders and consultants reveal foreigners are active on a large
scale in Chinese stocks, despite tight investment rules designed to
limit their activities.
Foreign hedge funds have found legal ways to bet on Chinese stocks
and derivatives without going through formal investment channels,
which prevent them using strategies such as short-selling, blamed by
some authorities for the sell-off.
"With current market volatility and weak retail investor sentiment,
these hedge fund strategies would naturally lead them to sell the
market ... which is against the government's intention of propping
up the market," said Oliver Barron, China market analyst at
investment bank NSBO in Beijing.
Since peaking in June, the Shanghai and Shenzhen markets have fallen
nearly 30 percent, triggering a crackdown on "malicious"
short-selling and a probe into automated trading practices commonly
used by hedge funds.
Hedge funds and proprietary traders boost market liquidity and form
part of any healthy stock market, but analysts say they can have an
outsized impact on China's exchanges which lack a stabilizing base
of buy-and-hold investors.
There are no public figures on the number of foreign hedge funds
operating in China, but industry insiders say there are hundreds
using a variety of structures that are legal but bypass formal
channels which are more visible and tightly controlled.
Typically, firms set up wholly owned onshore trading entities to
deal primarily in physical goods like commodities - anything from
nuts and bolts to nickel - and then expand into financial securities
through partnerships with local brokers, they said.
As far as the law is concerned, they are registered commodity
trading or consulting firms that are simply using their profits to
play the share market, just as any onshore company might do, or
selling trading advice to local investors.
"There are many obstacles for foreigners looking to either set up
share and futures trading operations onshore or gain market access
remotely, but there are a number of structures that firms can and do
use to get into the market," said Eric Neo, chief executive of Neo &
Partners Global which helps firms set up in China and other markets.
HONEY POT FOR HEDGE FUNDS
The proliferation of foreign hedge funds and proprietary traders is
also complicating the regulators' efforts to trace short-sellers.
"With these structures, once you've generated your profits you can
do what you like with them," said one executive who had helped set
up a U.S. trading firm in China. "There are more than a 120 million
trading accounts in Shanghai alone. No one can regulate that many
accounts and know what's going on."
China's markets watchdog has frozen almost 40 trading accounts for
"trading irregularities" since markets started to tumble, but it has
not alleged any illegality.
[to top of second column] |
Citadel Securities, a unit of the U.S. group that also owns hedge
fund Citadel LLC, identified itself this week as being linked to one
of these accounts - the only time a foreign firm has confirmed that
it has been caught up in the crackdown.
Citadel said it met all local laws and regulations.
The China Securities Regulatory Commission (CSRC) did not respond to
requests for comment. It has not named any holders of the accounts
suspended so far, though the stock exchanges have released a few
names of domestic account holders only.
Foreign hedge fund sources say they are watching the Citadel case
closely, concerned the crackdown could lead to a rewriting of
investment rules that would make it much harder for them to operate.
Chinese state media blame foreign speculators for the recent
sell-off, exhorting local investors to patriotically buy up shares.
But industry sources say many Chinese investors are putting their
cash with the hedge funds because they see it as a better way to
make quick money in an unpredictable market.
Apart from Citadel, big electronic trading firms operating in China
include U.S.-headquartered Virtu Financial Inc, which announced a
partnership this week with an unnamed Chinese brokerage. Virtu
currently focuses on commodity futures but wants to expand into
stocks.
High-speed powerhouses Tower Research Capital, IMC, Optiver and
Eclipse Trading are also in China, as well as quantitative
U.S.-based hedge funds D.E. Shaw, Pine River, Bridgewater and Och-Ziff,
according to sources familiar with their operations.
None of these firms are accused of any wrongdoing.
IMC, Tower Research, Bridgewater, Pine River, Optiver and Och-Ziff
declined to comment. D.E. Shaw did not comment when contacted.
Eclipse could not be reached for comment.
(Additional reporting by Samuel Shen in Shanghai; Emma Yang and Wiki
Su in Hong Kong; Svea Herbst in Boston; John McCrank in New York;
Editing by Mark Bendeich)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
