Daily Management Review

As Regulators clean up "Wild East", Chinese Hedge Fund Sent Scrambling


As Regulators clean up "Wild East", Chinese Hedge Fund Sent Scrambling
Stringent new rules, introduced overnight, that could see over half the industry shut down by August sent managers running to comply with the laws even as China's hedge fund industry was been thrown into disarray, reports Reuters.  
In a bid to save their licences after the regulator threatened last month to close down around 17,000 "phantom" fund managers as part of a broader government financial sector crackdown, domestic and foreign hedge fund managers are scrambling to secure legal advice, hire qualified staff and launch new products.
Many insiders describe the hedge fund industry as "Wild East" rife with fraud and the new rules aim to shrink the vast industry.
As China faces its slowest rate of growth in more than two decades, many say that the measures are heavy-handed and rushed, threatening to suffocate much-needed domestic and foreign institutional investment.
"It is very difficult for the regulators to police such a vast landscape so now they're trying to shake this number out. 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 direction," said Effie Vasilopoulos, a partner at law firm Sidley Austin in Hong Kong.
Amid fears the country's relaxed registration-based licensing regime has allowed fraudsters and shadow-lenders to proliferate, hedge funds have attracted increased scrutiny in China.
According to data from the Asset Management Association of China (AMAC), a self-regulatory body that oversees private funds, private fund registrations more than doubled in 2015 to reach more than 25,000. AMAC said that roughly two-thirds of these may be using the registration for illegal fund-raising or lending and are "phantom" fund managers that have not launched a product.
Industry insiders say that the AMAC licence, a requirement for operating a hedge fund, has often been used as cover for fraudulent peer-to-peer lending platforms even though many "phantom" funds may have done nothing illegal. Some fraudsters also raise money upfront for a bogus fund that is never launched.
AMAC said it was raising the bar with new risk management and qualification requirements last month on the eve of Chinese New Year, a week-long holiday in mainland China.
There would also be an obligation for new fund managers to obtain a legal opinion endorsing their operations and penalties for tardy information disclosures both with immediate effect.
Sparking a race to save registrations, the association said it would revoke the licences of fund managers if they failed to launch products by two separate deadlines in May and August, according to market participants.
"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. So there hasn't been much time to get to grips with them, and there is still a lot of ambiguity in the rules," said Ying White, a partner at law firm Clifford Chance's China office.
Market insiders said they expect as many as 12,000 fund managers to de-register or be shut down even as the rules spell boom times for lawyers, who can charge up to 100,000 yuan ($15,000) for a complex legal opinion.
They were working on new products in a bid to save the registration, reported Reuters quoting several managers listed by AMAC as having no products.
"We are aware of the new regulations. We have new private fund products that we are currently working on," said an employee at Shandong Province-based Ocean Brightstone Industrial Fund Management, who did not give their name.