Provides an introduction to hedge funds in China, including an assessment of the market landscape, the boom of the private fund sector, and recommendations for foreign investors looking to leverage the burgeoning opportunities.
After three decades of stunning development characterized by rapid economic development and continuous financial opening up, China has emerged as the world’s second-largest capital market. It also serves as one of the most important destinations for capital allocation for investors around the globe. To facilitate foreign investors’ participation in its capital market, China introduced programs and mechanisms such as Qualified Foreign Institutional Investors (QFII), RMB Qualified Foreign Institutional Investors (RQFII) and SH/SZ-HK Stock Connect. But with the Chinese government’s recent and ongoing efforts to open the country’s capital market, more foreign investors can now directly establish asset managers in China for asset allocation purposes.
Furthermore, with booming domestic demand for wealth management and rising market volatility as a result of the COVID-19 pandemic, China is striving to create more opportunities for hedge funds. As interest in Chinese hedge funds continues to rise, the sector is poised to make new headways. At the same time, driven by a boom in ESG (environmental, social and corporate governance) investment abroad and China’s 2030/60 carbon reduction and neutrality goals, has pushed hedge funds to take ESG factors into account when implementing investment decisions.
Despite the rising popularity of hedge funds in China, foreign investors still face headwinds on multiple fronts – constantly evolving compliance requirements and fierce local competition in particular pose significant challenges. Moreover, hedge funds’ business operations can be inherently complicated, due to the multitude of factors that must be considered at the initial stage of establishment. These include organizational form, site selection, registered capital, management structure and taxation.
This report, jointly produced by Tricor China and Tsinghua University PBC School of Finance (Tsinghua PBCSF), seeks to present our interpretations of how investment strategies by hedge funds in the Chinese capital market are involving, especially in terms of market share, performance, and compliance with applicable rules and regulations. Based on our careful analysis of market practice, we hope to provide suggestions that can facilitate the establishment and operation of hedge funds by foreign investors in China.
