China’s Hedge Funds Are Shorting Again

After surviving China’s crackdown on short bets made during the 2015-2016 stock market crisis, the country’s hedge fund industry is pushing the envelope again.

Firms have returned to shorting equities in the world’s second largest economy, according to Jeff Nie, chief risk officer of Hong Kong-based alternative investment managerKeywise Capital Management, which has $2.6 billion in assets under management.

“In the past 12 months, regulators have been relaxing restrictions, and the environment today is easier,” Nie said in an interview. “Equity shorting, though expensive, remains legal and some fund managers with strong convictions still take direct positions.”

Nie, who also serves as co-chairman of the Absolute Return Investment Management Association of China, estimates there are more than 800 active hedge funds in China, with dozens managing at least $1 billion. After regulators investigated and punished a number of firms a few years ago for market manipulation, they decided to give hedge funds more ways to produce alpha and hedge, without banning short positions, according to Nie.

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The cost of shorting stocks, which China made legal in 2010, is high. Brokers charge 8.3 percent to 11 percent annually for a short seller to borrow a stock — more than three times the cost in other markets, according to Nie. During the crisis, regulators temporarily banned shorting, but now allow firms to short more than 1,000 equities, he said.

China’s watchdogs have also made it legal for alternative asset managers to use a range of stocks and commodity futures and indexes to hedge their portfolios, said Nie. As a result, the Shanghai Stock Exchange’s SSE 50 Index, the CSI 300 Index Futures for large-cap companies on stock exchanges in Shenzhen and Shanghai, and the CSI 500 Index Futures for small-cap companies, have become popular.

“There are now many new ways to hedge in China that do not require direct shorts on equities,” Nie said.

Joel Coverdale, Asia Pacific managing director at Axioma, says China has become the risk management software firm’s single largest regional market since the crisis of 2015.”

“The 2015 stock market crisis and government crackdown on shorting forced managers to come up with alternative ways to hedge,” he said in an interview. “Our firm has been very successful in the U.S. in the past 10 to 15 years, but where do we see the growth? It’s obviously in this region in the next 10 to 15 years. China will be a significant part of that growth.”