Feeling hamstrung by a Beijing crackdown, growing numbers seek to set up new funds across the border
These investors, many of whom trained at Western financial institutions before returning home to China as its financial markets grew, say they are looking for better trading conditions.
“The regulation is constantly changing, and we are looking for markets with more stable trading regulations,” said Zhiyu Qin, chief executive of Beijing-based Hantak Investment Advisors, which oversees about 850 million yuan ($128 million).
Like several other firms planning new funds in Hong Kong, Hantak uses mathematical models to identify market patterns, and so was struck particularly by one of Chinese regulators’ more drastic moves. Stiff rules put in place last September effectively halted trading in stock-index futures, a key derivative for these funds.
The result: a 99% drop in the number of stock-index futures contracts changing hands on the Shanghai-based China Financial Futures Exchange—once the world’s biggest market for these derivatives—to fewer than one million in January from 61 million last June, according to the World Federation of Exchanges.
Mr. Qin and his investing partner, former quantitative traders for the $34 billion U.S. hedge-fund manager Millennium Management LLC, are emblematic of a wave of ambitious Chinese investors who returned to set up investment businesses in recent years after working at prestigious firms overseas.
They returned to join an industry that has grown quickly but works in an unpredictable environment. Chinese authorities were swift to blame last year’s stock-market crash on hedge funds, which weren’t legally recognized in the country until 2013. They quickly put curbs on betting against single stocks—shorting—a practice that was already prohibitively expensive.
Chinese hedge-fund managers say they aren’t yet closing up shop at home. Setting up new funds outside the country, though, will vastly expand the available markets and trading tools, such as the popular Singapore-traded FTSE China A50 futures contract.
“We have built a successful working strategy in China and can use similar ideas for trading other markets,” Mr. Qin said.
Deutsche Bank AG DB 0.72 % , which has made a strong bid to cater to Chinese hedge-fund clients, says last year it met with more than 75 managers in China that were looking to set up new funds outside the country.
Chinese funds setting up offshore are likely to rely heavily on Chinese investors who have diversified their cash holdings overseas, consultants and managers say. Attracting money held inside China is expected to be more challenging as Beijing fights heavy capital outflows from the mainland.
“What may throw a spanner in the works is the degree of capital-control restrictions we are now seeing,” said Effie Vasilopoulos, co-leader of law firm Sidley Austin LLP’s investment-funds practice in Asia. “This year is not going to be great for any business that is relying on Chinese capital for investment purposes.”
Bin Hu, who runs Coefficient Investment in Shanghai—and was formerly chief executive of Bank of New York Mellon Corp. BK 1.06 % ’s fund-management joint venture in China—plans to launch the firm’s first offshore hedge fund this month, according to people familiar with the matter. The fund has close to $100 million committed to begin trading with, according to one of the people.
Coefficient also uses mathematical models to bet on rising and falling stock prices, a trading strategy that was growing in popularity in China until being stalled by last year’s trading restrictions. Many such funds in China are “hedge-like without the core tools,” said Michael McCormack, an executive director for investment consultancy Z-Ben Advisors.
“For most of their lives even the simplest hedging tools weren’t available,” he said. “Hong Kong is a big upgrade on the breadth of the tool kit and the speed at which they can execute.”
Mr. McCormack said such funds have burnished their appeal among investors by performing strongly in China’s difficult stock market.
Mr. Qin’s Hantak fund, for instance, posted increases after fees that exceeded 4% in both June and July last year, as the Shanghai Composite dropped 7% and 14%, respectively, according to an investor presentation. It returned 0.5% in January as the index slid 22%.
—Chao Deng in Hong Kong and Yifan Xie in Shanghai contributed to this article.