Chinese Hedge Funds Face Forced Sales as Top Manager Plans Exit

The manager of a Chinese hedge fund that returned a surprising 86 percent during last year’s stock rout, will sell all its stock holdings as renewed fears tanked China’s markets again.

“We’re preparing to clear all stocks tomorrow when the market opens,” Xinhong Investment’s Chairman Lu Weidong, whose firm oversees less than $3 million in assets, said in an interview Thursday from his base in Dongguan in southern China. “A market like this is hard to rescue.”

Many private funds and hedge funds in China have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value. After the CSI 300 Index plunged in the worst start for the markets in two decades, as many as 30 percent of Chinese hedge funds may have reached those liquidation levels or are approaching them, Lu said. That will exacerbate selling pressure as money managers head for the exits.

“The selling pressure is huge,” Lu said. “They absolutely want to run.”

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 most recently 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.

Market Plunges

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.

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.

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.