China’s hedge funds show promise, development remains slow due to regulatory hurdles

The Chinese banking sector continues to flourish and the number of hedge fund investors is increasing rapidly in the country on the back of its strong economic growth.

Even as the European debt crisis slightly affected investor confidence last year, we remain optimistic about the future prospects of the hedge fund industry in China, as the Chinese banking sector continues to flourish on the back of its strong economic growth.

With ample cash assets in hand, the strong investment demand of China’s wealthy elites continues to provide hedge funds with abundant capital, while Chinese enterprises are also a primary source of capital for local hedge funds.

It is anticipated that China's GDP will quadruple in 10 years’ time and hedge funds will account for about 0.4% of the country's GDP. In the coming decade, the China market is expected to become the second largest in the world for hedge fund investments.

Under such buoyant market conditions, a large number of boutique hedge funds aimed at Chinese investors are being set up in the mainland, while the larger funds are still moist based in Hong Kong, observes Gary Lai, Associate Director of the Commerce Finance & Financial Services division of Robert Walters in Shanghai. Hiring in Hong Kong is forecasted to increase, as a large number of hedge fund firms are presently headquartered in Hong Kong.

‘Hedge funds in China are definitely hiring more qualified talent as the China market continues to grow and more firms are now based out of China. Having said that, headcounts needed are still relatively low, and the most sought-after roles consists of investment and research positions,” said Lai, who foresees steady growth in the China market, albeit still held back by stringent regulations imposed by the Chinese government.

Lai pointed out that industry professionals from the buy-side with subject matter expertise will be also be in great demand, while sell-side bankers may find it more challenging to immediately enter the industry.

While regulatory conditions have somewhat improved compared to the early days of China’s hedge fund industry, allowing more foreign and new players to come in, the China market remains essentially different from Hong Kong’s. Fund managers on the mainland do not employ the same tools or strategies of typical hedge funds based in Hong Kong, making the offshore market in Hong Kong a much more efficient one for investors.

“There is huge potential in the China market for hedge funds, while the extent of its growth in the coming years is still determined by the government’s regulatory policies,” Lai added. The development of the hedge fund industry in China is a clear testament to the continued growth and maturity of China’s financial system, and the industry will continue to hire more industry professionals with specialist knowledge to facilitate the demands of its growth.

Among investors on the mainland, China’s high-net worth individuals with the estimated combined assets of more than $700bn are anticipated to increase allocations of capital into the hedge fund space as the country’s high-net worth population continues to expand.