Chinese Regulator Cracks Down on Booming Hedge-Fund Industry

(Bloomberg) -- China’s securities regulator is cracking down on the fast-growing hedge-fund industry, investigating 10 cases of alleged wrongdoing.

Officials are probing private fund practices including market manipulation, misappropriation of client funds, insider trading and trading by managers using their personal accounts, the China Securities Regulatory Commission said in a statement on its website Friday. Some funds used the Hong Kong-Shanghai stock connect to manipulate prices and some employees sought personal gain by exploiting the hedging mechanism for stock index futures, it said.

China’s booming money-management industry includes private securities investment funds, which take money from wealthy investors and employ hedge-fund like strategies. They’re different from mutual funds, which are open to the general public, or vehicles that invest in private companies.

Already hit by scandals including the jailing of “hedge fund brother No. 1” Xu Xiang for market manipulation, the private funds industry is facing a rising tide of legal breaches, according to the CSRC. Talking generally, the regulator said many funds registered with false information, illegally raised money or misappropriated assets, while others manipulated markets and traded on inside information.

The crackdown comes as China mounts a campaign to limit financial dangers lurking in the economy. Last month, the securities regulator shelved applications for some mutual funds that plan to allocate at least 80 percent of their portfolios to Hong Kong-traded stocks as part of this drive.

At the same time, China is also opening up its financial industry to foreign firms. Global money managers including Man Group Plc, UBS Asset Management and Fidelity International have gotten approval to start private securities funds following regulators’ decision to open the market to international managers last year.

Read More: China Said to Weigh Delay in Asset-Management Product Rules

The enforcement effort related to private funds is intended to contain a “trend of rising legal violations,” the regulator said, adding it was cracking down “severely.”

A total of 8,294 hedge fund companies managed about 2.3 trillion yuan ($348 billion) as of Nov. 30 in private securities investment funds, according to data from the Asset Management Association of China. While assets under management slipped this year, the industry has had rapid growth after only beginning in 2004.

In March, the CSRC fined an individual for offences including using the Shanghai-Hong Kong connect to manipulate a Shanghai stock. Former hedge fund manager Xu, the high-flying “Brother No. 1,” was jailed for five-and-a-half years in January for market manipulation.

To contact Bloomberg News staff for this story: Gary Gao in Shanghai at cgao58@bloomberg.net.

©2017 Bloomberg L.P.

With assistance from Gary Gao