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Chinese Private Equity and Hedge Fund Boom

Chinese Private Equity and Hedge Fund Boom

Within the last 3 months, over 4,000 new hedge funds and private equity firms have launched in China.  At the end of May, the number of assets under management increased by $75bn to $433bn according to the Financial Times.

The chairman of hedge fund WinSure Capital has said that the government is encouraging investment and entrepreneurship in finance. He commented that during his 14 year stint in finance, he has never seen regulators so encouraging of innovation. Particularly in the investment industry where he thinks China will begin to take a lead.

Registration procedures for private equity and hedge funds have now been mostly abandoned by Chinese regulators who no longer require a strenuous approval process. The hike in set-up funds has resulted in a rise of fund employment of over 60,000 in the last three months alone.

This may have positive long term effects for the Chinese economy as most of these funds follow long-only strategies because short selling – which is limited by limitations on securities lending – is rarely possible in China.

Whilst western funds rely predominantly on high capital institutional investors for sales channels, their Chinese counterparts use banks and brokerages. Increased scrutiny from retail finance encourages long term investment – value of which is likely to be recognised soon which will prompt more investment.

In the absence of derivative products, Chinese funds are unable to use Western risk hedging techniques. They cannot offset risk through short-term risky products in the same way that the west can. This will have the likely effect of real-value creation in the long term.

A panel of industry executives at a seminar in New York this week said that the Chinese fund industry which emerged in recent months rivals the size of some of its biggest counterparts in Europe and the USA. Whilst low barriers to entry encourage western involvement, the lack of track records, liquidity in crisis, time zone differences and lack of understanding of foreign markets serves as a deterrent. It is however, a path which western investors are likely to follow in the near-future.

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