China’s crackdown on debt has slammed hedge funds

China’s crackdown on debt has slammed the country’s nascent hedge fund industry, as a bear market in bonds prompts banks to withdraw funds they had parked with external bond managers, cutting a key source of funds. Hedge funds barely existed in China five years ago, at least not formally, though a small group of superstar fund managers had operated in a regulatory grey zone. The industry boomed during the stock bubble of 2015, with the number of hedge funds increasing to more than 15,000 at the end of that year from less than 4,000 a year earlier… The bursting of the stock bubble in the summer of 2015 dealt a blow to equity hedge funds, but a subsequent run-up in the bond market sustained the industry through 2016. But bonds, too, suffered a rout of their own last year, as the central bank pushed up interest rates and the banking regulator launched a “regulatory windstorm” that discouraged banks from using leverage to boost returns on bond investments… Bonds are the asset of choice backing wealth management products – short-maturity investments that banks market to household and corporate clients as a higher-yielding alternative to traditional term deposits. Small and mid-size banks, which lack expertise in asset management, often farm out the management to external managers. So-called entrusted investments by banks became a crucial source of inflows for hedge funds.
 
Gabriel Wildau and Yizhen Jia

the country’s nascent hedge fund industry, as a bear market in bonds prompts banks to withdraw funds they had parked with external bond managers, cutting a key source of funds. Hedge funds barely existed in China five years ago, at least not formally, though a small group of superstar fund managers had operated in a regulatory grey zone. The industry boomed during the stock bubble of 2015, with the number of hedge funds increasing to more than 15,000 at the end of that year from less than 4,000 a year earlier… The bursting of the stock bubble in the summer of 2015 dealt a blow to equity hedge funds, but a subsequent run-up in the bond market sustained the industry through 2016. But bonds, too, suffered a rout of their own last year, as the central bank pushed up interest rates and the banking regulator launched a “regulatory windstorm” that discouraged banks from using leverage to boost returns on bond investments… Bonds are the asset of choice backing wealth management products – short-maturity investments that banks market to household and corporate clients as a higher-yielding alternative to traditional term deposits. Small and mid-size banks, which lack expertise in asset management, often farm out the management to external managers. So-called entrusted investments by banks became a crucial source of inflows for hedge funds.

 
Gabriel Wildau and Yizhen Jia

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