Hedge Funds in China Facing Forced Sales as Panic Spreads

  • Xinhong Investment says it will clear all stocks on Friday
  • As many as 30% may face mandatory liquidation, Xinhong says

Hedge funds in China are facing forced sales of stock holdings as the market plunge triggers a mandatory liquidation of assets.

The manager of a Chinese hedge fund that returned a surprising 86 percent during last year’s stock rout, Xinhong Investment, plans to sell all its stock holdings on Friday, Chairman Lu Weidong said in an interview. Hedge funds in China generally have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value, and as many as 30 percent of Chinese hedge funds may have reached those levels or are approaching them, Lu said.

“The selling pressure is huge,” Lu, whose firm oversees less than $3 million in assets, said on Thursday from his base in Dongguan in southern China. “They absolutely want to run.”

Panic is spreading as managers including George Soros are warning that global markets are facing a crisis and investors need to be cautious. China’s CSI 300 Index plunged 7.2 percent on Thursday before trading was halted by automatic circuit-breakers for the second time this week, after a weaker-than-estimated yuan fixing fueled concern that slowing economic growth is prompting authorities to guide the currency lower.

“We’re preparing to clear all stocks tomorrow when the market opens,” Lu said. “A market like this is hard to rescue.”

China’s securities regulator suspended the circuit-breaker Thursday night, signaling that the country’s leadership may reconsider or change the system.

Regulators Deliberate

The China Securities Regulatory Commission announced the suspension on its official microblog account, adding to concern that policy makers in the world’s second-largest economy are struggling with how to contain the months-long turmoil in its financial markets. The decision came hours after CSRC officials held an emergency meeting to discuss conditions on the nation’s tumbling stock market, according to a person familiar with the discussions who asked not to be named because he wasn’t authorized to speak publicly.

About 100 stock-focused Chinese private funds have lost more than 10 percent in the most recent month for which they’ve reported data, according to Howbuy Investment Management Co., which tracks such numbers. Most of the funds last updated numbers in December. Almost 1,300 Chinese hedge funds liquidated amid China’s $5 trillion stock selloff during the summer as the value of their equity holdings fell below mandatory levels agreed with investors, according to Howbuy.

‘Insane’ Market

Thursday’s slump forced at least one fund -- Shanghai Heqi Tongyi Asset Management Co. -- to dump its holdings. Chen Gang, Heqi Tongyi’s chief investment officer, described the markets as “insane,” and said the firm was forced to liquidate after reaching stop-loss levels.

Some other managers just didn’t have enough time to respond. Jiao Ji, whose hedge funds averaged a 61 percent return during the June-August summer rout after he successfully sold out before the market crash, said the trading halts this week came so quickly that he didn’t even have time to sell his holdings to curb losses. 

“It was quite abrupt on Monday, and it’s even more abrupt today,” Jiao, chairman of Sunrise Investment, based in northeastern China’s Jilin province, said by phone. “There’s not even a chance for a rebound.”

‘Already Scared’

Worries about losing the ability to sell after a trading halt added to market panic and selling pressure, because “people were already scared when the decline hit 3 percent,” pushing the fall quickly to the 7 percent level, Jiao said. 

Xinhong Investment’s Fuguo No. 1 fund was the best-performer among the 236 Chinese multi-strategy hedge funds from June to August, according to Shenzhen Rongzhi Investment Consultant Co. While that fund is still doing fine, another fund managed by the company is approaching its liquidation line, Xinhong’s Lu said.

Four of Sunrise’s funds made the top-10 list of the 2,193 stock funds in China in the three months through August, according to Shenzhen Rongzhi, which tracks hedge funds.

— With assistance by Dingmin Zhang

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