'China factor' lures global hedge funds to Hong Kong

The growing number of global hedge funds registered in Hong Kong is the result of "China factors" rather than tougher financial regulation in the United States and fluctuations in the commodity market, according to industrial experts.

Morgan Sze, the former head of Goldman Sachs' Principal Strategies Group in Asia, is gearing up his new hedge fund Hong Kong which will raise around 1 billion U.S. dollars and launch in early 2011.

Last November, Soros Fund Management LLC, the hedge fund firm founded by billionaire George Soros, opened its first Asian office in Hong Kong.

According to a report by Credit Suisse, 75 of the world's top 100 hedge funds are likely to set up Asian divisions, and Hong Kong is the top choice for location.

Heading for China's futures market

Since the last quarter of 2010, although the government of Hong Kong Special Administrative Region (HKSAR) continues to deny the rush, the amount of hot money rushing into mainland China via Hong Kong has appeared to be growing steadily.

In normal circumstances, foreign funds are only able to enter China through cross-border trade (current accounts) or foreign direct investment (capital accounts). For hedge funds and the hot money, the path exists with their domestic partner companies. The hedge funds put dollar assets into the accounts of partners, and the latter then put yuan assets into the funds' domestic accounts.

Arbitrage opportunities are the hot money's major target in China's domestic futures market. The demand from Chinese investors and consumers becomes the enticement that tempts foreign hedge funds firms to China.

An executive with a domestic futures company, who requested not to be identified, estimated that foreign funds account for around 30 percent of the total transaction volume of China's stock index futures.

"Some hedge funds that are keen at timing have realized returns of 30 to 40 percent," said a manager with a domestic investment management firm.

By People's Daily Online